LS materials.Ltd (KOSDAQ:417200) Seems To Use Debt Quite Sensibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that LS materials.,Ltd. (KOSDAQ:417200) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

View our latest analysis for LS materials.Ltd

What Is LS materials.Ltd's Debt?

The image below, which you can click on for greater detail, shows that LS materials.Ltd had debt of ₩7.04b at the end of March 2024, a reduction from ₩12.3b over a year. However, it does have ₩91.0b in cash offsetting this, leading to net cash of ₩83.9b.

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

The latest balance sheet data shows that LS materials.Ltd had liabilities of ₩43.7b due within a year, and liabilities of ₩1.05b falling due after that. Offsetting this, it had ₩91.0b in cash and ₩29.5b in receivables that were due within 12 months. So it actually has ₩75.6b 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. Simply put, the fact that LS materials.Ltd has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, LS materials.Ltd saw its EBIT drop by 5.6% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But it is LS materials.Ltd's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. LS materials.Ltd 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, 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 ₩83.9b in net cash and a decent-looking balance sheet. So we don't have any problem with LS materials.Ltd's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for LS materials.Ltd (2 are a bit unpleasant!) 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.

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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