We Think Namsun Aluminum (KRX:008350) Can Stay On Top Of Its Debt

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. We note that Namsun Aluminum Co., Ltd. (KRX:008350) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

What Is Namsun Aluminum's Debt?

You can click the graphic below for the historical numbers, but it shows that Namsun Aluminum had ₩11.4b of debt in December 2024, down from ₩29.6b, one year before. But it also has ₩52.7b in cash to offset that, meaning it has ₩41.3b net cash.

How Strong Is Namsun Aluminum's Balance Sheet?

The latest balance sheet data shows that Namsun Aluminum had liabilities of ₩57.9b due within a year, and liabilities of ₩49.2b falling due after that. Offsetting these obligations, it had cash of ₩52.7b as well as receivables valued at ₩60.2b due within 12 months. So it can boast ₩5.70b more liquid assets than total liabilities.

This short term liquidity is a sign that Namsun Aluminum could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Namsun Aluminum has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Namsun Aluminum

The modesty of its debt load may become crucial for Namsun Aluminum if management cannot prevent a repeat of the 25% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Namsun Aluminum will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Namsun Aluminum 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 two years, Namsun Aluminum recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Namsun Aluminum has net cash of ₩41.3b, as well as more liquid assets than liabilities. So we are not troubled with Namsun Aluminum's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Namsun Aluminum that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.