These 4 Measures Indicate That LG H&H (KRX:051900) Is Using Debt Reasonably Well

Warren Buffett famously said, '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. As with many other companies LG H&H Co., Ltd. (KRX:051900) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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, 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.

See our latest analysis for LG H&H

What Is LG H&H's Net Debt?

The image below, which you can click on for greater detail, shows that LG H&H had debt of ₩148.3b at the end of December 2023, a reduction from ₩238.2b over a year. However, it does have ₩927.0b in cash offsetting this, leading to net cash of ₩778.7b.

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

We can see from the most recent balance sheet that LG H&H had liabilities of ₩1.09t falling due within a year, and liabilities of ₩581.7b due beyond that. On the other hand, it had cash of ₩927.0b and ₩556.8b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩187.5b.

Of course, LG H&H has a market capitalization of ₩5.38t, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, LG H&H boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for LG H&H if management cannot prevent a repeat of the 32% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

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. Over the most recent three years, LG H&H recorded free cash flow worth 60% 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

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 ₩778.7b. So we don't have any problem with LG H&H's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with LG H&H .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.