Here's Why CLIO CosmeticsLtd (KOSDAQ:237880) Can Manage Its Debt Responsibly

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 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?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. 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. 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 CLIO CosmeticsLtd

What Is CLIO CosmeticsLtd's Net Debt?

As you can see below, CLIO CosmeticsLtd had ₩12.5b of debt at September 2020, down from ₩13.5b a year prior. But it also has ₩64.5b in cash to offset that, meaning it has ₩52.0b net cash.

A Look At CLIO CosmeticsLtd's Liabilities

According to the last reported balance sheet, CLIO CosmeticsLtd had liabilities of ₩58.3b due within 12 months, and liabilities of ₩21.7b due beyond 12 months. Offsetting this, it had ₩64.5b in cash and ₩25.2b in receivables that were due within 12 months. So it actually has ₩9.69b more liquid assets than total liabilities.

This short term liquidity is a sign that CLIO CosmeticsLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that CLIO CosmeticsLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, CLIO CosmeticsLtd's EBIT dived 18%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While CLIO CosmeticsLtd 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. Happily for any shareholders, CLIO CosmeticsLtd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case CLIO CosmeticsLtd has ₩52.0b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩14b, being 230% of its EBIT. So we are not troubled with CLIO CosmeticsLtd's debt use. 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 instance, we've identified 1 warning sign for CLIO CosmeticsLtd that 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. 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.
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