LOTTE (KRX:004990) Has No Shortage Of Debt

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, LOTTE Corporation (KRX:004990) does carry debt. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is LOTTE's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2025 LOTTE had ₩9.21t of debt, an increase on ₩8.29t, over one year. However, it also had ₩2.58t in cash, and so its net debt is ₩6.63t.

A Look At LOTTE's Liabilities

The latest balance sheet data shows that LOTTE had liabilities of ₩7.02t due within a year, and liabilities of ₩7.14t falling due after that. Offsetting these obligations, it had cash of ₩2.58t as well as receivables valued at ₩1.50t due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩10t.

This deficit casts a shadow over the ₩2.21t company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, LOTTE would likely require a major re-capitalisation if it had to pay its creditors today.

Check out our latest analysis for LOTTE

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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Weak interest cover of 0.95 times and a disturbingly high net debt to EBITDA ratio of 5.4 hit our confidence in LOTTE like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. Even worse, LOTTE saw its EBIT tank 37% over the last 12 months. If earnings continue to follow that trajectory, paying off that debt load will be harder than convincing us to run a marathon in the rain. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine LOTTE'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 company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, LOTTE saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

On the face of it, LOTTE's EBIT growth rate left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. And furthermore, its interest cover also fails to instill confidence. It looks to us like LOTTE carries a significant balance sheet burden. If you harvest honey without a bee suit, you risk getting stung, so we'd probably stay away from this particular stock. 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. Be aware that LOTTE is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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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.