LG H&H (KRX:051900) Has A Pretty Healthy Balance Sheet

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 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. We note that LG H&H Co., Ltd. (KRX:051900) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for LG H&H

What Is LG H&H's Debt?

As you can see below, LG H&H had ₩209.9b of debt at June 2024, down from ₩253.0b a year prior. However, it does have ₩1.11t in cash offsetting this, leading to net cash of ₩905.1b.

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

According to the last reported balance sheet, LG H&H had liabilities of ₩1.26t due within 12 months, and liabilities of ₩586.8b due beyond 12 months. Offsetting these obligations, it had cash of ₩1.11t as well as receivables valued at ₩704.6b due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that LG H&H's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₩5.52t company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, LG H&H boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact LG H&H's saving grace is its low debt levels, because its EBIT has tanked 21% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if LG H&H 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. LG H&H 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. During the last three years, LG H&H produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about LG H&H's liabilities, but we can be reassured by the fact it has has net cash of ₩905.1b. And it impressed us with free cash flow of ₩396b, being 71% of its EBIT. So we don't have any problem with LG H&H's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with LG H&H , and understanding them should be part of your investment process.

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.

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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.