AMOREPACIFIC Holdings (KRX:002790) Seems To Use Debt Rather Sparingly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, AMOREPACIFIC Holdings Corp. (KRX:002790) does carry debt. But is this debt a concern to shareholders?

We've discovered 2 warning signs about AMOREPACIFIC Holdings. View them for free.

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.

How Much Debt Does AMOREPACIFIC Holdings Carry?

The image below, which you can click on for greater detail, shows that at December 2024 AMOREPACIFIC Holdings had debt of ₩326.2b, up from ₩277.1b in one year. However, its balance sheet shows it holds ₩1.51t in cash, so it actually has ₩1.18t net cash.

How Strong Is AMOREPACIFIC Holdings' Balance Sheet?

The latest balance sheet data shows that AMOREPACIFIC Holdings had liabilities of ₩1.14t due within a year, and liabilities of ₩410.7b falling due after that. Offsetting these obligations, it had cash of ₩1.51t as well as receivables valued at ₩441.0b due within 12 months. So it can boast ₩401.5b more liquid assets than total liabilities.

This excess liquidity suggests that AMOREPACIFIC Holdings is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that AMOREPACIFIC Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for AMOREPACIFIC Holdings

On top of that, AMOREPACIFIC Holdings grew its EBIT by 64% 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 ultimately the future profitability of the business will decide if AMOREPACIFIC Holdings 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 company can only pay off debt with cold hard cash, not accounting profits. While AMOREPACIFIC Holdings 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. During the last three years, AMOREPACIFIC Holdings produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case AMOREPACIFIC Holdings has ₩1.18t in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 64% over the last year. So is AMOREPACIFIC Holdings'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 learn about the 2 warning signs we've spotted with AMOREPACIFIC Holdings (including 1 which can't be ignored) .

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.