Korea Zinc Company (KRX:010130) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Korea Zinc Company, Ltd. (KRX:010130) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 Korea Zinc Company

What Is Korea Zinc Company's Debt?

As you can see below, at the end of June 2024, Korea Zinc Company had ₩1.33t of debt, up from ₩1.01t a year ago. Click the image for more detail. However, it does have ₩2.13t in cash offsetting this, leading to net cash of ₩798.9b.

How Strong Is Korea Zinc Company's Balance Sheet?

We can see from the most recent balance sheet that Korea Zinc Company had liabilities of ₩2.73t falling due within a year, and liabilities of ₩830.8b due beyond that. Offsetting this, it had ₩2.13t in cash and ₩743.9b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩690.2b.

Of course, Korea Zinc Company has a market capitalization of ₩11t, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Korea Zinc Company boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Korea Zinc Company has boosted its EBIT by 46%, thus reducing the spectre of future debt repayments. 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 Zinc Company'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Korea Zinc Company 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. In the last three years, Korea Zinc Company's free cash flow amounted to 31% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about Korea Zinc Company's liabilities, but we can be reassured by the fact it has has net cash of ₩798.9b. And it impressed us with its EBIT growth of 46% over the last year. So we don't think Korea Zinc Company'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. Case in point: We've spotted 2 warning signs for Korea Zinc Company 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.