Korea Petrochemical Ind (KRX:006650) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Korea Petrochemical Ind. Co., Ltd. (KRX:006650) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Korea Petrochemical Ind

How Much Debt Does Korea Petrochemical Ind Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Korea Petrochemical Ind had ₩168.1b of debt, an increase on ₩156.6b, over one year. But it also has ₩219.2b in cash to offset that, meaning it has ₩51.1b net cash.

How Strong Is Korea Petrochemical Ind's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Korea Petrochemical Ind had liabilities of ₩540.6b due within 12 months and liabilities of ₩78.6b due beyond that. Offsetting this, it had ₩219.2b in cash and ₩245.9b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩154.1b.

While this might seem like a lot, it is not so bad since Korea Petrochemical Ind has a market capitalization of ₩562.0b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Korea Petrochemical Ind also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Korea Petrochemical Ind'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.

In the last year Korea Petrochemical Ind wasn't profitable at an EBIT level, but managed to grow its revenue by 37%, to ₩2.7t. With any luck the company will be able to grow its way to profitability.

So How Risky Is Korea Petrochemical Ind?

Although Korea Petrochemical Ind had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of ₩5.8b. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. The good news for Korea Petrochemical Ind shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock is risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Korea Petrochemical Ind's profit, revenue, and operating cashflow have changed over the last few years.

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.