Is LG CNS (KRX:064400) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, LG CNS Co., Ltd. (KRX:064400) does carry debt. But the real question is whether this debt is making the company risky.

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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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does LG CNS Carry?

The image below, which you can click on for greater detail, shows that LG CNS had debt of ₩444.0b at the end of March 2025, a reduction from ₩551.9b over a year. However, it does have ₩1.83t in cash offsetting this, leading to net cash of ₩1.39t.

How Healthy Is LG CNS' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that LG CNS had liabilities of ₩1.74t due within 12 months and liabilities of ₩348.9b due beyond that. On the other hand, it had cash of ₩1.83t and ₩999.2b worth of receivables due within a year. So it actually has ₩742.0b more liquid assets than total liabilities.

This surplus suggests that LG CNS has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that LG CNS has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for LG CNS

Also positive, LG CNS grew its EBIT by 30% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine LG CNS'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. LG CNS 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. During the last three years, LG CNS produced sturdy free cash flow equating to 69% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that LG CNS has net cash of ₩1.39t, as well as more liquid assets than liabilities. And we liked the look of last year's 30% year-on-year EBIT growth. So is LG CNS'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. We've identified 1 warning sign with LG CNS , and understanding them should be part of your investment process.

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.