Stock Analysis
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- KOSE:A002790
Is AMOREPACIFIC Group (KRX:002790) A Risky Investment?
Warren Buffett famously said, '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. As with many other companies AMOREPACIFIC Group (KRX:002790) makes use of debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for AMOREPACIFIC Group
What Is AMOREPACIFIC Group's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2024 AMOREPACIFIC Group had ₩322.8b of debt, an increase on ₩264.4b, over one year. However, it does have ₩1.36t in cash offsetting this, leading to net cash of ₩1.04t.
How Strong Is AMOREPACIFIC Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that AMOREPACIFIC Group had liabilities of ₩1.01t due within 12 months and liabilities of ₩427.5b due beyond that. Offsetting this, it had ₩1.36t in cash and ₩402.9b in receivables that were due within 12 months. So it can boast ₩323.4b more liquid assets than total liabilities.
It's good to see that AMOREPACIFIC Group has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, AMOREPACIFIC Group boasts net cash, so it's fair to say it does not have a heavy debt load!
AMOREPACIFIC Group's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 ₩1.04t, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩199b, being 106% of its EBIT. So we don't think AMOREPACIFIC Group's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with AMOREPACIFIC Group (including 1 which makes us a bit uncomfortable) .
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.
About KOSE:A002790
AMOREPACIFIC Group
Through its subsidiaries, engages in manufacturing, marketing, and trading of cosmetics, personal care goods, and other related products in Korea, Asia, North America, and internationally.