Is C&C International (KOSDAQ:352480) Using Too Much Debt?

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 C&C International Co., Ltd. (KOSDAQ:352480) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for C&C International

What Is C&C International's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 C&C International had ₩53.6b of debt, an increase on ₩25.6b, over one year. But it also has ₩92.2b in cash to offset that, meaning it has ₩38.5b net cash.

How Healthy Is C&C International's Balance Sheet?

We can see from the most recent balance sheet that C&C International had liabilities of ₩72.7b falling due within a year, and liabilities of ₩27.9b due beyond that. On the other hand, it had cash of ₩92.2b and ₩38.4b worth of receivables due within a year. So it actually has ₩30.0b more liquid assets than total liabilities.

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

On top of that, C&C International grew its EBIT by 34% over the last twelve months, and that growth will make it easier to handle its debt. 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 C&C International'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. C&C International 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, C&C International reported free cash flow worth 7.7% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that C&C International has net cash of ₩38.5b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 34% over the last year. So we don't think C&C International's use of debt is risky. 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. We've identified 2 warning signs with C&C International (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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.