AMOREPACIFIC Group (KRX:002790) 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 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 AMOREPACIFIC Group (KRX:002790) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for AMOREPACIFIC Group

How Much Debt Does AMOREPACIFIC Group Carry?

As you can see below, at the end of December 2023, AMOREPACIFIC Group had ₩277.1b of debt, up from ₩240.9b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩1.78t in cash, so it actually has ₩1.50t net cash.

How Healthy Is AMOREPACIFIC Group's Balance Sheet?

According to the last reported balance sheet, AMOREPACIFIC Group had liabilities of ₩856.2b due within 12 months, and liabilities of ₩250.1b due beyond 12 months. Offsetting this, it had ₩1.78t in cash and ₩343.6b in receivables that were due within 12 months. So it actually has ₩1.02t more liquid assets than total liabilities.

This luscious liquidity implies that AMOREPACIFIC Group's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, AMOREPACIFIC Group boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact AMOREPACIFIC Group's saving grace is its low debt levels, because its EBIT has tanked 44% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 AMOREPACIFIC Group'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. AMOREPACIFIC Group 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. Happily for any shareholders, AMOREPACIFIC Group 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 we empathize with investors who find debt concerning, you should keep in mind that AMOREPACIFIC Group has net cash of ₩1.50t, as well as more liquid assets than liabilities. The cherry on top was that in converted 104% of that EBIT to free cash flow, bringing in ₩158b. So is AMOREPACIFIC Group's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. 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 AMOREPACIFIC Group .

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.