Is LG H&H (KRX:051900) Using Too Much Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, LG H&H Co., Ltd. (KRX:051900) does carry debt. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is LG H&H's Net Debt?

As you can see below, at the end of December 2024, LG H&H had ₩243.3b of debt, up from ₩148.3b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩1.27t in cash, so it actually has ₩1.03t net cash.

How Healthy Is LG H&H's Balance Sheet?

We can see from the most recent balance sheet that LG H&H had liabilities of ₩1.30t falling due within a year, and liabilities of ₩424.0b due beyond that. Offsetting this, it had ₩1.27t in cash and ₩592.3b in receivables that were due within 12 months. So it actually has ₩143.5b more liquid assets than total liabilities.

This surplus suggests that LG H&H has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, LG H&H boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for LG H&H

But the other side of the story is that LG H&H saw its EBIT decline by 5.7% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine LG H&H'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While LG H&H 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, LG H&H recorded free cash flow worth 73% 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 we empathize with investors who find debt concerning, you should keep in mind that LG H&H has net cash of ₩1.03t, as well as more liquid assets than liabilities. The cherry on top was that in converted 73% of that EBIT to free cash flow, bringing in ₩380b. So we don't think LG H&H's use of debt is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with LG H&H .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.