Here's Why Lotte Tour Development (KRX:032350) Has A Meaningful Debt Burden

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Lotte Tour Development Co., Ltd. (KRX:032350) makes use of debt. But the real question is whether this debt is making the company risky.

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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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Lotte Tour Development's Debt?

As you can see below, Lotte Tour Development had ₩982.8b of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had ₩67.0b in cash, and so its net debt is ₩915.8b.

How Healthy Is Lotte Tour Development's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Lotte Tour Development had liabilities of ₩609.7b due within 12 months and liabilities of ₩1.24t due beyond that. On the other hand, it had cash of ₩67.0b and ₩31.1b worth of receivables due within a year. So it has liabilities totalling ₩1.76t more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₩678.1b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Lotte Tour Development would likely require a major re-capitalisation if it had to pay its creditors today.

See our latest analysis for Lotte Tour Development

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Weak interest cover of 0.26 times and a disturbingly high net debt to EBITDA ratio of 7.4 hit our confidence in Lotte Tour Development like a one-two punch to the gut. The debt burden here is substantial. However, the silver lining was that Lotte Tour Development achieved a positive EBIT of ₩39b in the last twelve months, an improvement on the prior year's loss. 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 Lotte Tour Development's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, Lotte Tour Development actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

To be frank both Lotte Tour Development's interest cover and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But at least it's pretty decent at converting EBIT to free cash flow; that's encouraging. We're quite clear that we consider Lotte Tour Development to be really rather risky, as a result of its balance sheet health. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. While Lotte Tour Development didn't make a statutory profit in the last year, its positive EBIT suggests that profitability might not be far away. Click here to see if its earnings are heading in the right direction, over the medium term .

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.