Amorepacific (KRX:090430) Seems To Use Debt Rather Sparingly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 can see that Amorepacific Corporation (KRX:090430) does use debt in its business. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Amorepacific's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Amorepacific had ₩306.2b of debt, an increase on ₩244.1b, over one year. However, its balance sheet shows it holds ₩754.7b in cash, so it actually has ₩448.5b net cash.

How Strong Is Amorepacific's Balance Sheet?

According to the last reported balance sheet, Amorepacific had liabilities of ₩1.10t due within 12 months, and liabilities of ₩361.8b due beyond 12 months. On the other hand, it had cash of ₩754.7b and ₩424.5b worth of receivables due within a year. So it has liabilities totalling ₩278.3b more than its cash and near-term receivables, combined.

Of course, Amorepacific has a market capitalization of ₩7.60t, so these liabilities are probably manageable. 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, Amorepacific boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Amorepacific

Even more impressive was the fact that Amorepacific grew its EBIT by 104% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. During the last three years, Amorepacific produced sturdy free cash flow equating to 78% 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 Amorepacific has ₩448.5b in net cash. And we liked the look of last year's 104% year-on-year EBIT growth. So we don't think Amorepacific's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Amorepacific is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.