Is LK CHEM (KOSDAQ:489500) A Risky Investment?

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.' 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 note that LK CHEM Co., Ltd. (KOSDAQ:489500) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is LK CHEM's Debt?

You can click the graphic below for the historical numbers, but it shows that LK CHEM had ₩3.59b of debt in September 2025, down from ₩5.11b, one year before. However, its balance sheet shows it holds ₩28.0b in cash, so it actually has ₩24.4b net cash.

How Strong Is LK CHEM's Balance Sheet?

The latest balance sheet data shows that LK CHEM had liabilities of ₩3.07b due within a year, and liabilities of ₩3.54b falling due after that. Offsetting these obligations, it had cash of ₩28.0b as well as receivables valued at ₩2.75b due within 12 months. So it actually has ₩24.1b more liquid assets than total liabilities.

This short term liquidity is a sign that LK CHEM could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that LK CHEM has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for LK CHEM

The modesty of its debt load may become crucial for LK CHEM if management cannot prevent a repeat of the 50% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 LK CHEM'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While LK CHEM has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, LK CHEM saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that LK CHEM has net cash of ₩24.4b, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about LK CHEM's balance sheet. 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. Be aware that LK CHEM is showing 2 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.