Is Crown Confectionery (KRX:264900) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Crown Confectionery Co., Ltd. (KRX:264900) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Crown Confectionery

What Is Crown Confectionery's Net Debt?

As you can see below, Crown Confectionery had ₩17.0b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds ₩17.5b in cash, so it actually has ₩489.3m net cash.

How Strong Is Crown Confectionery's Balance Sheet?

We can see from the most recent balance sheet that Crown Confectionery had liabilities of ₩80.7b falling due within a year, and liabilities of ₩55.5b due beyond that. Offsetting this, it had ₩17.5b in cash and ₩52.4b in receivables that were due within 12 months. So it has liabilities totalling ₩66.2b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Crown Confectionery has a market capitalization of ₩126.6b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Crown Confectionery boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Crown Confectionery grew its EBIT by 41% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Crown Confectionery will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Crown Confectionery 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. Over the last three years, Crown Confectionery reported free cash flow worth 10% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

Although Crown Confectionery's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₩489.3m. And we liked the look of last year's 41% year-on-year EBIT growth. So we don't have any problem with Crown Confectionery's use of debt. 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 3 warning signs for Crown Confectionery (1 is potentially serious) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com