Does LOT VACUUM (KOSDAQ:083310) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that LOT VACUUM Co., Ltd. (KOSDAQ:083310) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for LOT VACUUM

What Is LOT VACUUM's Net Debt?

You can click the graphic below for the historical numbers, but it shows that LOT VACUUM had ₩20.3b of debt in September 2024, down from ₩24.8b, one year before. However, its balance sheet shows it holds ₩117.9b in cash, so it actually has ₩97.6b net cash.

How Healthy Is LOT VACUUM's Balance Sheet?

We can see from the most recent balance sheet that LOT VACUUM had liabilities of ₩59.8b falling due within a year, and liabilities of ₩10.7b due beyond that. Offsetting this, it had ₩117.9b in cash and ₩23.1b in receivables that were due within 12 months. So it actually has ₩70.4b more liquid assets than total liabilities.

This surplus strongly suggests that LOT VACUUM has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that LOT VACUUM has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for LOT VACUUM if management cannot prevent a repeat of the 77% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since LOT VACUUM 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While LOT VACUUM 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. During the last three years, LOT VACUUM produced sturdy free cash flow equating to 73% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case LOT VACUUM has ₩97.6b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩14b, being 73% of its EBIT. So is LOT VACUUM's debt a risk? It doesn't seem so to us. 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 4 warning signs for LOT VACUUM 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.