These 4 Measures Indicate That Nongshim (KRX:004370) Is Using Debt Safely

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.' 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. We can see that Nongshim Co., Ltd. (KRX:004370) does use debt in its business. But is this debt a concern to shareholders?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. 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. However, its balance sheet shows it holds ₩707.4b in cash, so it actually has ₩533.0b net cash.

How Strong Is Nongshim's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nongshim had liabilities of ₩617.5b due within 12 months and liabilities of ₩156.6b due beyond that. Offsetting these obligations, it had cash of ₩707.4b as well as receivables valued at ₩228.0b due within 12 months. So it can boast ₩161.2b more liquid assets than total liabilities.

This surplus suggests that Nongshim has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Nongshim has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Nongshim grew its EBIT by 84% over the last twelve months, and that growth will make it easier to handle its 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 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 is Nongshim'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. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Nongshim , and understanding them should be part of your investment process.

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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