Hyundai Energy SolutionsLtd (KRX:322000) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Hyundai Energy Solutions Co.,Ltd (KRX:322000) makes use of debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Hyundai Energy SolutionsLtd

What Is Hyundai Energy SolutionsLtd's Net Debt?

As you can see below, at the end of December 2020, Hyundai Energy SolutionsLtd had ₩65.7b of debt, up from ₩23.6b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩112.1b in cash, so it actually has ₩46.5b net cash.

A Look At Hyundai Energy SolutionsLtd's Liabilities

We can see from the most recent balance sheet that Hyundai Energy SolutionsLtd had liabilities of ₩108.3b falling due within a year, and liabilities of ₩21.2b due beyond that. On the other hand, it had cash of ₩112.1b and ₩78.3b worth of receivables due within a year. So it actually has ₩60.9b more liquid assets than total liabilities.

This excess liquidity suggests that Hyundai Energy SolutionsLtd is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Hyundai Energy SolutionsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Hyundai Energy SolutionsLtd if management cannot prevent a repeat of the 60% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hyundai Energy SolutionsLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. During the last two years, Hyundai Energy SolutionsLtd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Hyundai Energy SolutionsLtd has ₩46.5b in net cash and a decent-looking balance sheet. So we are not troubled with Hyundai Energy SolutionsLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 5 warning signs with Hyundai Energy SolutionsLtd (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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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