Does LG (KRX:003550) Have A Healthy Balance Sheet?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that LG Corp. (KRX:003550) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for LG

What Is LG's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 LG had debt of ₩1.23t, up from ₩1.12t in one year. However, its balance sheet shows it holds ₩2.96t in cash, so it actually has ₩1.73t net cash.

How Strong Is LG's Balance Sheet?

We can see from the most recent balance sheet that LG had liabilities of ₩2.13t falling due within a year, and liabilities of ₩1.29t due beyond that. Offsetting these obligations, it had cash of ₩2.96t as well as receivables valued at ₩1.31t due within 12 months. So it can boast ₩852.9b more liquid assets than total liabilities.

This short term liquidity is a sign that LG could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, LG boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that LG has boosted its EBIT by 71%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine LG'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. LG 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. In the last three years, LG's free cash flow amounted to 26% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that LG has net cash of ₩1.73t, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 71% over the last year. So is LG's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that LG is showing 1 warning sign in our investment analysis , 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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