Hwang Kum Steel & Technology (KRX:032560) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Hwang Kum Steel & Technology Co., Ltd (KRX:032560) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Hwang Kum Steel & Technology

What Is Hwang Kum Steel & Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that Hwang Kum Steel & Technology had ₩81.9b of debt in June 2020, down from ₩119.2b, one year before. But on the other hand it also has ₩115.3b in cash, leading to a ₩33.4b net cash position.

A Look At Hwang Kum Steel & Technology's Liabilities

According to the last reported balance sheet, Hwang Kum Steel & Technology had liabilities of ₩102.4b due within 12 months, and liabilities of ₩27.4b due beyond 12 months. Offsetting these obligations, it had cash of ₩115.3b as well as receivables valued at ₩36.1b due within 12 months. So it can boast ₩21.6b more liquid assets than total liabilities.

It's good to see that Hwang Kum Steel & Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Hwang Kum Steel & Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Hwang Kum Steel & Technology's saving grace is its low debt levels, because its EBIT has tanked 23% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Hwang Kum Steel & Technology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Hwang Kum Steel & Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Hwang Kum Steel & Technology's free cash flow amounted to 22% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Hwang Kum Steel & Technology has net cash of ₩33.4b, as well as more liquid assets than liabilities. So we don't have any problem with Hwang Kum Steel & Technology's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Hwang Kum Steel & Technology that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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