Does LS materials.Ltd (KOSDAQ:417200) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, LS materials.,Ltd. (KOSDAQ:417200) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for LS materials.Ltd

What Is LS materials.Ltd's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 LS materials.Ltd had debt of ₩12.1b, up from ₩2.10b in one year. But on the other hand it also has ₩79.7b in cash, leading to a ₩67.6b net cash position.

How Healthy Is LS materials.Ltd's Balance Sheet?

The latest balance sheet data shows that LS materials.Ltd had liabilities of ₩62.2b due within a year, and liabilities of ₩1.05b falling due after that. Offsetting these obligations, it had cash of ₩79.7b as well as receivables valued at ₩26.6b due within 12 months. So it actually has ₩43.0b more liquid assets than total liabilities.

This surplus suggests that LS materials.Ltd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, LS materials.Ltd 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 LS materials.Ltd if management cannot prevent a repeat of the 39% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since LS materials.Ltd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While LS materials.Ltd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, LS materials.Ltd 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 LS materials.Ltd has ₩67.6b in net cash and a decent-looking balance sheet. So while LS materials.Ltd does not have a great balance sheet, it's certainly not too bad. 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. For example, we've discovered 2 warning signs for LS materials.Ltd that you should be aware of before investing here.

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.

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

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.