Is Hyundai Autoever (KRX:307950) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that Hyundai Autoever Corporation (KRX:307950) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Hyundai Autoever

What Is Hyundai Autoever's Debt?

The image below, which you can click on for greater detail, shows that Hyundai Autoever had debt of ₩50.0b at the end of March 2024, a reduction from ₩80.1b over a year. However, it does have ₩683.0b in cash offsetting this, leading to net cash of ₩633.1b.

A Look At Hyundai Autoever's Liabilities

We can see from the most recent balance sheet that Hyundai Autoever had liabilities of ₩728.7b falling due within a year, and liabilities of ₩355.2b due beyond that. Offsetting this, it had ₩683.0b in cash and ₩735.4b in receivables that were due within 12 months. So it can boast ₩334.5b more liquid assets than total liabilities.

This surplus suggests that Hyundai Autoever has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Hyundai Autoever boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Hyundai Autoever has been able to increase its EBIT by 21% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Hyundai Autoever's ability to maintain a healthy balance sheet going forward. 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 Autoever 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 three years, Hyundai Autoever produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hyundai Autoever has net cash of ₩633.1b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩102b, being 71% of its EBIT. So we don't think Hyundai Autoever's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Hyundai Autoever, you may well want to click here to check an interactive graph of its earnings per share history.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

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