We Think LOT VACUUM (KOSDAQ:083310) Can Stay On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that LOT VACUUM Co., Ltd. (KOSDAQ:083310) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. 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 LOT VACUUM

How Much Debt Does LOT VACUUM Carry?

As you can see below, LOT VACUUM had ₩25.4b of debt at December 2020, down from ₩51.6b a year prior. However, its balance sheet shows it holds ₩68.0b in cash, so it actually has ₩42.6b 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 ₩60.3b falling due within a year, and liabilities of ₩5.31b due beyond that. On the other hand, it had cash of ₩68.0b and ₩15.6b worth of receivables due within a year. So it can boast ₩18.0b more liquid assets than total liabilities.

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

Although LOT VACUUM made a loss at the EBIT level, last year, it was also good to see that it generated ₩3.8b in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine LOT VACUUM'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. LOT VACUUM 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. Happily for any shareholders, LOT VACUUM actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case LOT VACUUM has ₩42.6b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩18b, being 475% of its EBIT. So is LOT VACUUM's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for LOT VACUUM that you should be aware of before investing here.

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. 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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