Here's Why AMOREPACIFIC Group (KRX:002790) Can Manage Its Debt Responsibly

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

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 AMOREPACIFIC Group

What Is AMOREPACIFIC Group's Debt?

As you can see below, AMOREPACIFIC Group had ₩219.2b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has ₩1.58t in cash to offset that, meaning it has ₩1.36t net cash.

How Healthy Is AMOREPACIFIC Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that AMOREPACIFIC Group had liabilities of ₩1.08t due within 12 months and liabilities of ₩419.1b due beyond that. Offsetting these obligations, it had cash of ₩1.58t as well as receivables valued at ₩435.4b due within 12 months. So it actually has ₩520.3b more liquid assets than total liabilities.

This surplus suggests that AMOREPACIFIC Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that AMOREPACIFIC Group has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that AMOREPACIFIC Group's load is not too heavy, because its EBIT was down 50% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if AMOREPACIFIC Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While AMOREPACIFIC Group 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 most recent three years, AMOREPACIFIC Group recorded free cash flow worth 64% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case AMOREPACIFIC Group has ₩1.36t in net cash and a decent-looking balance sheet. So we don't have any problem with AMOREPACIFIC Group's use of debt. 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. For instance, we've identified 4 warning signs for AMOREPACIFIC Group 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.

If you’re looking to trade AMOREPACIFIC Group, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide 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 (at) simplywallst.com.