NAVER (KRX:035420) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, '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 can see that NAVER Corporation (KRX:035420) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for NAVER

How Much Debt Does NAVER Carry?

The image below, which you can click on for greater detail, shows that NAVER had debt of ₩3.36t at the end of March 2024, a reduction from ₩4.35t over a year. But it also has ₩5.42t in cash to offset that, meaning it has ₩2.05t net cash.

How Strong Is NAVER's Balance Sheet?

According to the last reported balance sheet, NAVER had liabilities of ₩5.78t due within 12 months, and liabilities of ₩5.48t due beyond 12 months. On the other hand, it had cash of ₩5.42t and ₩1.72t worth of receivables due within a year. So its liabilities total ₩4.12t more than the combination of its cash and short-term receivables.

Given NAVER has a humongous market capitalization of ₩27t, it's hard to believe these liabilities pose much threat. 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, NAVER boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that NAVER grew its EBIT by 20% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine NAVER'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. NAVER 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. Over the most recent three years, NAVER recorded free cash flow worth 75% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although NAVER's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₩2.05t. And it impressed us with free cash flow of ₩1.6t, being 75% of its EBIT. So is NAVER's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in NAVER, you may well want to click here to check an interactive graph of its earnings per share history.

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.

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