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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Amorepacific Corporation (KRX:090430) does have debt on its balance sheet. But is this debt a concern to shareholders?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Amorepacific

What Is Amorepacific's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Amorepacific had debt of ₩259.9b, up from ₩247.2b in one year. However, its balance sheet shows it holds ₩1.19t in cash, so it actually has ₩930.7b net cash.

How Healthy Is Amorepacific's Balance Sheet?

The latest balance sheet data shows that Amorepacific had liabilities of ₩902.4b due within a year, and liabilities of ₩215.6b falling due after that. Offsetting these obligations, it had cash of ₩1.19t as well as receivables valued at ₩378.9b due within 12 months. So it actually has ₩451.5b 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!

But the other side of the story is that Amorepacific saw its EBIT decline by 3.4% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Amorepacific can strengthen its balance sheet over time. 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. 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 ₩930.7b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩240b, being 147% of its EBIT. So we don't think Amorepacific's use of debt is risky. 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. Case in point: We've spotted 2 warning signs for Amorepacific you should be aware of.

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.