Is Lotte Chilsung Beverage (KRX:005300) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Lotte Chilsung Beverage Co., Ltd. (KRX:005300) makes use of debt. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

What Is Lotte Chilsung Beverage's Debt?

The chart below, which you can click on for greater detail, shows that Lotte Chilsung Beverage had ₩1.61t in debt in June 2025; about the same as the year before. However, because it has a cash reserve of ₩175.9b, its net debt is less, at about ₩1.44t.

How Strong Is Lotte Chilsung Beverage's Balance Sheet?

According to the last reported balance sheet, Lotte Chilsung Beverage had liabilities of ₩1.61t due within 12 months, and liabilities of ₩1.17t due beyond 12 months. On the other hand, it had cash of ₩175.9b and ₩347.3b worth of receivables due within a year. So its liabilities total ₩2.26t more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₩1.22t company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Lotte Chilsung Beverage would probably need a major re-capitalization if its creditors were to demand repayment.

See 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 (3.4) 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. More concerning, Lotte Chilsung Beverage saw its EBIT drop by 7.3% in the last twelve months. If that earnings trend continues the company will face an uphill battle to pay off its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Lotte Chilsung Beverage can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Looking at the most recent three years, Lotte Chilsung Beverage recorded free cash flow of 22% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

Mulling over Lotte Chilsung Beverage's attempt at staying on top of its total liabilities, we're certainly not enthusiastic. And even its net debt to EBITDA fails to inspire much confidence. Taking into account all the aforementioned factors, it looks like 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 Lotte Chilsung Beverage has 3 warning signs (and 1 which is significant) we think you should know about.

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.