Is LG Display (KRX:034220) Using Debt In A Risky Way?

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. We can see that LG Display Co., Ltd. (KRX:034220) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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.

See our latest analysis for LG Display

What Is LG Display's Debt?

As you can see below, LG Display had ₩17t of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had ₩3.38t in cash, and so its net debt is ₩14t.

How Strong Is LG Display's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that LG Display had liabilities of ₩14t due within 12 months and liabilities of ₩13t due beyond that. On the other hand, it had cash of ₩3.38t and ₩3.24t worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩20t.

The deficiency here weighs heavily on the ₩5.06t company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, LG Display would probably need a major re-capitalization if its creditors were to demand repayment. 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 LG Display'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.

In the last year LG Display had a loss before interest and tax, and actually shrunk its revenue by 8.0%, to ₩22t. That's not what we would hope to see.

Caveat Emptor

Importantly, LG Display had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping ₩1.9t. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized ₩1.9t in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for LG Display that you should be aware of before investing here.

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.