CLIO CosmeticsLtd (KOSDAQ:237880) Seems To Use Debt Rather Sparingly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that CLIO Cosmetics Co.,Ltd (KOSDAQ:237880) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

See our latest analysis for CLIO CosmeticsLtd

What Is CLIO CosmeticsLtd's Debt?

The image below, which you can click on for greater detail, shows that CLIO CosmeticsLtd had debt of ₩12.3b at the end of June 2020, a reduction from ₩13.2b over a year. However, its balance sheet shows it holds ₩63.9b in cash, so it actually has ₩51.6b net cash.

A Look At CLIO CosmeticsLtd's Liabilities

The latest balance sheet data shows that CLIO CosmeticsLtd had liabilities of ₩59.7b due within a year, and liabilities of ₩23.2b falling due after that. Offsetting these obligations, it had cash of ₩63.9b as well as receivables valued at ₩23.6b due within 12 months. So it can boast ₩4.58b more liquid assets than total liabilities.

This state of affairs indicates that CLIO CosmeticsLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₩284.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, CLIO CosmeticsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that CLIO CosmeticsLtd grew its EBIT by 118% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine CLIO CosmeticsLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. CLIO CosmeticsLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, CLIO CosmeticsLtd actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case CLIO CosmeticsLtd has ₩51.6b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 217% of that EBIT to free cash flow, bringing in ₩14b. So we don't think CLIO CosmeticsLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with CLIO CosmeticsLtd .

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.

If you decide to trade CLIO CosmeticsLtd, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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