We Think LIG Nex1 (KRX:079550) Can Manage Its Debt With Ease

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that LIG Nex1 Co., Ltd. (KRX:079550) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

We've discovered 1 warning sign about LIG Nex1. View them for free.

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is LIG Nex1's Net Debt?

As you can see below, at the end of December 2024, LIG Nex1 had ₩391.4b of debt, up from ₩202.6b a year ago. Click the image for more detail. But it also has ₩568.2b in cash to offset that, meaning it has ₩176.7b net cash.

A Look At LIG Nex1's Liabilities

According to the last reported balance sheet, LIG Nex1 had liabilities of ₩4.62t due within 12 months, and liabilities of ₩271.3b due beyond 12 months. On the other hand, it had cash of ₩568.2b and ₩425.4b worth of receivables due within a year. So it has liabilities totalling ₩3.89t more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since LIG Nex1 has a market capitalization of ₩8.28t, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, LIG Nex1 also has more cash than debt, so we're pretty confident it can manage its debt safely.

View our latest analysis for LIG Nex1

Another good sign is that LIG Nex1 has been able to increase its EBIT by 23% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine LIG Nex1'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. While LIG Nex1 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. Over the last three years, LIG Nex1 actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While LIG Nex1 does have more liabilities than liquid assets, it also has net cash of ₩176.7b. The cherry on top was that in converted 193% of that EBIT to free cash flow, bringing in ₩385b. So is LIG Nex1'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. For example - LIG Nex1 has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.