These 4 Measures Indicate That LG (KRX:003550) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 LG Corp. (KRX:003550) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for LG

What Is LG's Net Debt?

The image below, which you can click on for greater detail, shows that LG had debt of ₩1.20t at the end of September 2020, a reduction from ₩1.33t over a year. But on the other hand it also has ₩3.04t in cash, leading to a ₩1.84t net cash position.

How Strong Is LG's Balance Sheet?

According to the last reported balance sheet, LG had liabilities of ₩1.96t due within 12 months, and liabilities of ₩1.36t due beyond 12 months. Offsetting this, it had ₩3.04t in cash and ₩1.01t in receivables that were due within 12 months. So it actually has ₩730.8b more liquid assets than total liabilities.

This surplus suggests that LG has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, LG boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that LG has been able to increase its EBIT by 23% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if LG can strengthen its balance sheet over time. 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. 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. Looking at the most recent three years, LG recorded free cash flow of 26% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that LG has net cash of ₩1.84t, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 23% over the last year. So we don't think LG's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of LG's earnings per share history for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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