Does Kumho Petro ChemicalLtd (KRX:011780) Have A Healthy Balance Sheet?

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 Kumho Petro Chemical Co.,Ltd (KRX:011780) does have debt on its balance sheet. But is this debt a concern to shareholders?

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Kumho Petro ChemicalLtd

What Is Kumho Petro ChemicalLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Kumho Petro ChemicalLtd had ₩933.6b of debt, an increase on ₩733.2b, over one year. But it also has ₩1.09t in cash to offset that, meaning it has ₩157.8b net cash.

A Look At Kumho Petro ChemicalLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Kumho Petro ChemicalLtd had liabilities of ₩1.80t due within 12 months and liabilities of ₩787.2b due beyond that. Offsetting these obligations, it had cash of ₩1.09t as well as receivables valued at ₩978.6b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩514.8b.

Given Kumho Petro ChemicalLtd has a market capitalization of ₩3.27t, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Kumho Petro ChemicalLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Kumho Petro ChemicalLtd's saving grace is its low debt levels, because its EBIT has tanked 46% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Kumho Petro ChemicalLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Kumho Petro ChemicalLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Kumho Petro ChemicalLtd recorded free cash flow of 44% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Kumho Petro ChemicalLtd does have more liabilities than liquid assets, it also has net cash of ₩157.8b. So we are not troubled with Kumho Petro ChemicalLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Kumho Petro ChemicalLtd .

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.