Hanjin Heavy Industries & Construction Holdings (KRX:003480) Has A Somewhat Strained Balance Sheet

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.' 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 Hanjin Heavy Industries & Construction Holdings Co., Ltd. (KRX:003480) does use debt in its business. But is this debt a concern to shareholders?

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When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

How Much Debt Does Hanjin Heavy Industries & Construction Holdings Carry?

The image below, which you can click on for greater detail, shows that Hanjin Heavy Industries & Construction Holdings had debt of ₩682.6b at the end of December 2024, a reduction from ₩742.1b over a year. However, it also had ₩170.6b in cash, and so its net debt is ₩512.0b.

How Strong Is Hanjin Heavy Industries & Construction Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hanjin Heavy Industries & Construction Holdings had liabilities of ₩714.0b due within 12 months and liabilities of ₩715.2b due beyond that. On the other hand, it had cash of ₩170.6b and ₩265.7b worth of receivables due within a year. So it has liabilities totalling ₩992.9b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₩117.9b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Hanjin Heavy Industries & Construction Holdings would likely require a major re-capitalisation if it had to pay its creditors today.

Check out our latest analysis for Hanjin Heavy Industries & Construction Holdings

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

While Hanjin Heavy Industries & Construction Holdings's debt to EBITDA ratio (4.4) suggests that it uses some debt, its interest cover is very weak, at 1.6, suggesting high leverage. In large part that's due to the company's significant depreciation and amortisation charges, which arguably mean its EBITDA is a very generous measure of earnings, and its debt may be more of a burden than it first appears. It seems clear that the cost of borrowing money is negatively impacting returns for shareholders, of late. On a slightly more positive note, Hanjin Heavy Industries & Construction Holdings grew its EBIT at 17% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hanjin Heavy Industries & Construction Holdings 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Happily for any shareholders, Hanjin Heavy Industries & Construction Holdings actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

Hanjin Heavy Industries & Construction Holdings's level of total liabilities and interest cover definitely weigh on it, in our esteem. But the good news is it seems to be able to convert EBIT to free cash flow with ease. We should also note that Gas Utilities industry companies like Hanjin Heavy Industries & Construction Holdings commonly do use debt without problems. Taking the abovementioned factors together we do think Hanjin Heavy Industries & Construction Holdings's debt poses some risks to the business. While that debt can boost returns, we think the company has enough leverage now. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Hanjin Heavy Industries & Construction Holdings has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.