Does Lotte Chilsung Beverage (KRX:005300) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Lotte Chilsung Beverage Co., Ltd. (KRX:005300) does have debt on its balance sheet. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

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 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, 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.

What Is Lotte Chilsung Beverage's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2025 Lotte Chilsung Beverage had ₩1.77t of debt, an increase on ₩1.58t, over one year. However, because it has a cash reserve of ₩289.8b, its net debt is less, at about ₩1.48t.

A Look At Lotte Chilsung Beverage's Liabilities

The latest balance sheet data shows that Lotte Chilsung Beverage had liabilities of ₩1.74t due within a year, and liabilities of ₩1.20t falling due after that. Offsetting this, it had ₩289.8b in cash and ₩335.2b in receivables that were due within 12 months. So it has liabilities totalling ₩2.32t more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₩1.34t company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Lotte Chilsung Beverage would probably need a major re-capitalization if its creditors were to demand repayment.

View our latest analysis for Lotte Chilsung Beverage

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.

While Lotte Chilsung Beverage's debt to EBITDA ratio (3.6) suggests that it uses some debt, its interest cover is very weak, at 2.4, suggesting high leverage. It seems that the business incurs large depreciation and amortisation charges, so maybe its debt load is heavier than it would first appear, since EBITDA is arguably a generous measure of earnings. So shareholders should probably be aware that interest expenses appear to have really impacted the business lately. Even more troubling is the fact that Lotte Chilsung Beverage actually let its EBIT decrease by 7.9% over the last year. If that earnings trend continues the company will face an uphill battle to pay off 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 Lotte Chilsung Beverage 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. So it's worth checking how much of that EBIT is backed by free cash flow. In the last three years, Lotte Chilsung Beverage's free cash flow amounted to 23% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

Mulling over Lotte Chilsung Beverage's attempt at staying on top of its total liabilities, we're certainly not enthusiastic. And furthermore, its net debt to EBITDA also fails to instill confidence. After considering the datapoints discussed, we think Lotte Chilsung Beverage has too much debt. While some investors love that sort of risky play, it's certainly not our cup of tea. 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. For example, we've discovered 3 warning signs for Lotte Chilsung Beverage (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.