Amorepacific (KRX:090430) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, '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. As with many other companies Amorepacific Corporation (KRX:090430) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Amorepacific

What Is Amorepacific's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Amorepacific had ₩244.1b of debt, an increase on ₩223.4b, over one year. But it also has ₩1.08t in cash to offset that, meaning it has ₩835.9b net cash.

A Look At Amorepacific's Liabilities

We can see from the most recent balance sheet that Amorepacific had liabilities of ₩813.3b falling due within a year, and liabilities of ₩200.5b due beyond that. Offsetting this, it had ₩1.08t in cash and ₩329.2b in receivables that were due within 12 months. So it actually has ₩395.4b more liquid assets than total liabilities.

This short term liquidity is a sign that Amorepacific could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Amorepacific 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 Amorepacific if management cannot prevent a repeat of the 50% 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. 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 Amorepacific'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 company can only pay off debt with cold hard cash, not accounting profits. While Amorepacific 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 last three years, Amorepacific actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Amorepacific has ₩835.9b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩175b, being 114% of its EBIT. So we are not troubled with Amorepacific's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Amorepacific that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.