We Think Hwang Kum Steel & Technology (KRX:032560) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Hwang Kum Steel & Technology Co., Ltd (KRX:032560) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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?

The image below, which you can click on for greater detail, shows that at September 2020 Hwang Kum Steel & Technology had debt of ₩102.2b, up from ₩93.2b in one year. However, it does have ₩109.8b in cash offsetting this, leading to net cash of ₩7.62b.

How Healthy Is Hwang Kum Steel & Technology's Balance Sheet?

The latest balance sheet data shows that Hwang Kum Steel & Technology had liabilities of ₩143.7b due within a year, and liabilities of ₩19.9b falling due after that. On the other hand, it had cash of ₩109.8b and ₩40.3b worth of receivables due within a year. So it has liabilities totalling ₩13.5b more than its cash and near-term receivables, combined.

Since publicly traded Hwang Kum Steel & Technology shares are worth a total of ₩120.0b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Hwang Kum Steel & Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

While Hwang Kum Steel & Technology doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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. Hwang Kum Steel & Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Hwang Kum Steel & Technology created free cash flow amounting to 5.0% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While Hwang Kum Steel & Technology does have more liabilities than liquid assets, it also has net cash of ₩7.62b. So we are not troubled with Hwang Kum Steel & Technology's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Hwang Kum Steel & Technology is showing 3 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

If you’re looking to trade Hwang Kum Steel & Technology, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.