Is Hanwha Solutions (KRX:009830) Using Too Much Debt?

Warren Buffett famously said, '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. Importantly, Hanwha Solutions Corporation (KRX:009830) does carry debt. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Hanwha Solutions's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2025 Hanwha Solutions had debt of ₩14t, up from ₩12t in one year. However, it does have ₩1.90t in cash offsetting this, leading to net debt of about ₩13t.

How Healthy Is Hanwha Solutions' Balance Sheet?

The latest balance sheet data shows that Hanwha Solutions had liabilities of ₩12t due within a year, and liabilities of ₩8.94t falling due after that. Offsetting these obligations, it had cash of ₩1.90t as well as receivables valued at ₩3.28t due within 12 months. So its liabilities total ₩16t more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the ₩4.59t 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, Hanwha Solutions would likely require a major re-capitalisation if it had to pay its creditors today.

View our latest analysis for Hanwha Solutions

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Weak interest cover of 0.52 times and a disturbingly high net debt to EBITDA ratio of 12.5 hit our confidence in Hanwha Solutions like a one-two punch to the gut. The debt burden here is substantial. One redeeming factor for Hanwha Solutions is that it turned last year's EBIT loss into a gain of ₩231b, over the last twelve months. 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 Hanwha Solutions's ability to maintain a healthy balance sheet going forward. 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. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. During the last year, Hanwha Solutions burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

To be frank both Hanwha Solutions's conversion of EBIT to free cash flow and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. Having said that, its ability to grow its EBIT isn't such a worry. Considering all the factors previously mentioned, we think that Hanwha Solutions really is carrying too much debt. To our minds, that means the stock is rather high risk, and probably one to avoid; but to each their own (investing) style. 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. We've identified 2 warning signs with Hanwha Solutions , and understanding them should be part of your investment process.

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.

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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.