Does Korea Electric Power (KRX:015760) 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.' 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 Korea Electric Power Corporation (KRX:015760) does use debt in its business. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Korea Electric Power's Debt?

The chart below, which you can click on for greater detail, shows that Korea Electric Power had ₩133t in debt in December 2024; about the same as the year before. However, because it has a cash reserve of ₩5.24t, its net debt is less, at about ₩127t.

A Look At Korea Electric Power's Liabilities

According to the last reported balance sheet, Korea Electric Power had liabilities of ₩64t due within 12 months, and liabilities of ₩141t due beyond 12 months. On the other hand, it had cash of ₩5.24t and ₩12t worth of receivables due within a year. So its liabilities total ₩188t more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₩15t company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Korea Electric Power would likely require a major re-capitalisation if it had to pay its creditors today.

Check out our latest analysis for Korea Electric Power

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Weak interest cover of 2.0 times and a disturbingly high net debt to EBITDA ratio of 5.9 hit our confidence in Korea Electric Power like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. One redeeming factor for Korea Electric Power is that it turned last year's EBIT loss into a gain of ₩8.4t, over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Korea Electric Power can strengthen its balance sheet over time. 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. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, Korea Electric Power reported free cash flow worth 19% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

To be frank both Korea Electric Power's net debt to EBITDA and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. Having said that, its ability to grow its EBIT isn't such a worry. It's also worth noting that Korea Electric Power is in the Electric Utilities industry, which is often considered to be quite defensive. After considering the datapoints discussed, we think Korea Electric Power has too much debt. That sort of riskiness is ok for some, but it certainly doesn't float our boat. 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 Korea Electric Power (1 shouldn't be ignored!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.