Here's Why LG Household & Health Care (KRX:051900) Can Manage Its Debt Responsibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that LG Household & Health Care Ltd. (KRX:051900) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for LG Household & Health Care

What Is LG Household & Health Care's Net Debt?

As you can see below, LG Household & Health Care had ₩353.4b of debt at September 2020, down from ₩502.2b a year prior. But on the other hand it also has ₩430.3b in cash, leading to a ₩76.9b net cash position.

How Strong Is LG Household & Health Care's Balance Sheet?

The latest balance sheet data shows that LG Household & Health Care had liabilities of ₩1.56t due within a year, and liabilities of ₩502.7b falling due after that. Offsetting this, it had ₩430.3b in cash and ₩778.8b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩851.8b.

Given LG Household & Health Care has a humongous market capitalization of ₩25t, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, LG Household & Health Care boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that LG Household & Health Care has increased its EBIT by 5.2% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine LG Household & Health Care's ability to maintain a healthy balance sheet going forward. 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. LG Household & Health Care 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 Household & Health Care produced sturdy free cash flow equating to 51% 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 look at a company's total liabilities, it is very reassuring that LG Household & Health Care has ₩76.9b in net cash. So we don't have any problem with LG Household & Health Care's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in LG Household & Health Care, you may well want to click here to check an interactive graph of its earnings per share history.

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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