Hyundai Engineering has run up warning signs on its balance sheet, ending a debt-free run as cash flow deteriorated and its debt ratio surged. Receivables from overseas projects kept piling up, and the builder covered a shortfall in working capital with borrowings, drawing down cash holdings while sharply increasing debt. The debt ratio eased somewhat after spiking in 2024 but remains the third highest among Korea's 10 largest builders.
Hyundai Engineering's consolidated debt ratio stood at a relatively sound 108% in 2023 but jumped to 241% the following year on a large operating loss, according to the Financial Supervisory Service on the 8th. It improved to 203% in the first half of this year, still close to double the 2023 level. That is about 25% higher than the 162.5% average for the 10 largest builders by construction capacity ratings this year.
The bigger issue is cash flow rather than the debt ratio. Cash flow from operating activities was negative 100.1 billion won in 2023 and negative 138 billion won in 2024, before deteriorating to negative 987.1 billion won last year. In the first half of this year it came to negative 760.1 billion won, meaning that in six months the company drained cash equal to much of last year's full-year shortfall. Given that construction hinges on actual cash coming in from operations rather than simply on whether the income statement shows a profit, analysts see the figures as a red flag for management.
Behind the cash shortfall is a buildup in trade receivables. On a consolidated basis, receivables rose to 2.8786 trillion won in the first half of this year from 1.8291 trillion won at the end of 2023, an increase of 1.0495 trillion won, or about 57%, in two and a half years. That means the pace of converting sales into cash is not keeping up, adding to the working capital burden. Cash and cash equivalents, by contrast, peaked at 1.7331 trillion won in 2024 before falling to 1.1611 trillion won in the first half of this year.
The debt ratio surged as the company plugged the cash gap with borrowings. Short-term borrowings, which stood at zero as recently as 2023, rose to 520 billion won in 2024 and 930 billion won last year, then swelled to 1.385 trillion won in the first half of this year. Total borrowings including long-term debt climbed to 1.5767 trillion won in the first half, a sharp deterioration in the balance sheet. With cash burning off quickly, the company is raising debt to fund working capital. As of the first half, Hyundai Engineering had become a net borrower, with short- and long-term borrowings exceeding cash and equivalents by 415.6 billion won.
One positive is that earnings themselves are improving. After posting an operating loss of 1.24 trillion won in 2024, the company swung to an operating profit of 277.8 billion won last year and earned 214.4 billion won in the first half of this year. The turnaround is read as the result of shoring up profitability rather than expanding scale. Since Chu Woo-jeong, regarded as a finance specialist within Hyundai Motor Group and with no prior experience in construction, took the helm early last year, Hyundai Engineering has been shifting strategy to screen out low-margin work and selectively take on profitable projects.
The problem is that the earnings improvement has not translated into a recovery in cash generation. With the construction downturn dragging on, it is difficult to expand orders in housing and building as well as in civil engineering and plant work, while higher raw material prices stemming from the war in Iran make it hard to bring down cost ratios.
The order pipeline is also shrinking. The order backlog fell to 24.6261 trillion won at the end of last year from 30.9082 trillion won, as annual new orders halved over the same period to 7.0895 trillion won from 14.991 trillion won. Cumulative new orders rebounded to 9.3897 trillion won in the first half of this year, but the backlog has yet to recover, standing at 28.1491 trillion won. Against that backdrop, a possible business suspension over a fatal accident last February at a construction site on the Sejong-Pocheon expressway could also pose a risk to future order growth.
Hyundai Engineering is reshaping its business around profitability, but improved earnings alone are no guarantee of a stronger balance sheet. Experts stressed that building a structure in which money earned actually comes in as cash and is used to pay down debt could determine whether the push for sounder management succeeds.
