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

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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for AMOREPACIFIC Group

What Is AMOREPACIFIC Group's Debt?

As you can see below, at the end of June 2024, AMOREPACIFIC Group had ₩279.8b of debt, up from ₩252.6b a year ago. Click the image for more detail. But it also has ₩1.42t in cash to offset that, meaning it has ₩1.14t net cash.

A Look At AMOREPACIFIC Group's Liabilities

Zooming in on the latest balance sheet data, we can see that AMOREPACIFIC Group had liabilities of ₩1.15t due within 12 months and liabilities of ₩432.4b due beyond that. Offsetting this, it had ₩1.42t in cash and ₩387.6b in receivables that were due within 12 months. So it can boast ₩224.1b more liquid assets than total liabilities.

This short term liquidity is a sign that AMOREPACIFIC Group could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 25% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. 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. Happily for any shareholders, AMOREPACIFIC Group actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that AMOREPACIFIC Group has net cash of ₩1.14t, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩201b, being 139% of its EBIT. So we are not troubled with AMOREPACIFIC Group'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 AMOREPACIFIC Group that you should be aware of.

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.