We Think HD Hyundai Energy SolutionsLtd (KRX:322000) Can Stay On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that HD Hyundai Energy Solutions Co.,Ltd. (KRX:322000) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for HD Hyundai Energy SolutionsLtd

What Is HD Hyundai Energy SolutionsLtd's Debt?

As you can see below, HD Hyundai Energy SolutionsLtd had ₩46.2b of debt at December 2023, down from ₩68.5b a year prior. However, it does have ₩104.9b in cash offsetting this, leading to net cash of ₩58.7b.

How Strong Is HD Hyundai Energy SolutionsLtd's Balance Sheet?

We can see from the most recent balance sheet that HD Hyundai Energy SolutionsLtd had liabilities of ₩105.3b falling due within a year, and liabilities of ₩25.2b due beyond that. Offsetting this, it had ₩104.9b in cash and ₩81.8b in receivables that were due within 12 months. So it can boast ₩56.2b more liquid assets than total liabilities.

This excess liquidity suggests that HD Hyundai Energy SolutionsLtd is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that HD Hyundai Energy SolutionsLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that HD Hyundai Energy SolutionsLtd's load is not too heavy, because its EBIT was down 81% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if HD Hyundai Energy SolutionsLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. HD Hyundai Energy SolutionsLtd 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. Over the last three years, HD Hyundai Energy SolutionsLtd reported free cash flow worth 18% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case HD Hyundai Energy SolutionsLtd has ₩58.7b in net cash and a decent-looking balance sheet. So we don't have any problem with HD Hyundai Energy SolutionsLtd's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - HD Hyundai Energy SolutionsLtd has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.