Here's Why Korea Electric Power Industrial Development (KRX:130660) Can Manage Its Debt Responsibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 can see that Korea Electric Power Industrial Development Co., Ltd (KRX:130660) does use debt in its business. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Korea Electric Power Industrial Development's Debt?

The chart below, which you can click on for greater detail, shows that Korea Electric Power Industrial Development had ₩6.78b in debt in March 2025; about the same as the year before. But on the other hand it also has ₩45.0b in cash, leading to a ₩38.2b net cash position.

How Strong Is Korea Electric Power Industrial Development's Balance Sheet?

We can see from the most recent balance sheet that Korea Electric Power Industrial Development had liabilities of ₩58.5b falling due within a year, and liabilities of ₩42.7b due beyond that. Offsetting these obligations, it had cash of ₩45.0b as well as receivables valued at ₩41.8b due within 12 months. So it has liabilities totalling ₩14.3b more than its cash and near-term receivables, combined.

Of course, Korea Electric Power Industrial Development has a market capitalization of ₩479.5b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Korea Electric Power Industrial Development also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for Korea Electric Power Industrial Development

The modesty of its debt load may become crucial for Korea Electric Power Industrial Development if management cannot prevent a repeat of the 46% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is Korea Electric Power Industrial Development's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Korea Electric Power Industrial Development 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, Korea Electric Power Industrial Development actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Korea Electric Power Industrial Development has ₩38.2b in net cash. The cherry on top was that in converted 109% of that EBIT to free cash flow, bringing in ₩27b. So we don't have any problem with Korea Electric Power Industrial Development's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Korea Electric Power Industrial Development , and understanding them should be part of your investment process.

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. 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.