Nongshim (KRX:004370) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Nongshim Co., Ltd. (KRX:004370) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Nongshim

What Is Nongshim's Debt?

The image below, which you can click on for greater detail, shows that Nongshim had debt of ₩174.3b at the end of September 2020, a reduction from ₩194.7b over a year. But it also has ₩707.4b in cash to offset that, meaning it has ₩533.0b net cash.

How Strong Is Nongshim's Balance Sheet?

The latest balance sheet data shows that Nongshim had liabilities of ₩617.5b due within a year, and liabilities of ₩156.6b falling due after that. On the other hand, it had cash of ₩707.4b and ₩228.0b worth of receivables due within a year. So it actually has ₩161.2b more liquid assets than total liabilities.

This short term liquidity is a sign that Nongshim could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Nongshim has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Nongshim has boosted its EBIT by 84%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Nongshim 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. While Nongshim 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. In the last three years, Nongshim's free cash flow amounted to 24% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Nongshim has ₩533.0b in net cash and a decent-looking balance sheet. And we liked the look of last year's 84% year-on-year EBIT growth. So we don't think Nongshim's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Nongshim that you should be aware of.

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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