[Edaily Marketin Reporter LEE GEON-EOM ] LOTTE Himart(071840)Financial uncertainty is mounting at the company amid distortions in financial indicators caused by massive goodwill on its balance sheet. Goodwill—which far exceeds current assets that can be liquidated within a year—accounts for 62% of total capital, creating a misleading picture of the company’s financial soundness. Compounding this, the downturn in the home appliance industry has significantly eroded the profitability of its core business, raising concerns about a sharp deterioration in its financial structure due to large-scale goodwill write-downs.

According to the Financial Supervisory Service’s electronic disclosure system on the 29th, LOTTE Himart’s goodwill stood at 572.9 billion won as of the end of the first quarter of this year. At the same time, current assets totaled only 557.6 billion won. This means that goodwill—a book value—exceeds readily available cash and cash equivalents by 15.3 billion won.

The proportion of goodwill relative to total capital has also risen sharply. Total capital, which stood at 942.9 billion won at the end of last year, decreased by 28.8 billion won to 914.1 billion won in the first quarter of this year. Meanwhile, goodwill remained unchanged at 572.9 billion won during the same period, causing the proportion of goodwill relative to total capital to rise to 62.7%.

The disproportionately high share of goodwill is creating an optical illusion that obscures LOTTE Himart’s actual financial burden. Looking solely at surface-level financial indicators, the debt-to-asset ratio—calculated by dividing total debt by total assets—stood at 22.9% at the end of the first quarter of this year, a stable level showing little change from the end of last year (22.8%).

However, the picture changes when we recalculate the ratio by subtracting the 572.9 billion won in goodwill—whose immediate liquidity is uncertain—from total assets, the denominator. As of the end of the first quarter of this year, the actual debt-to-asset ratio stands at 33.2%, more than 10 percentage points higher than the ratio based on total assets (22.9%). Since this gap is created by the massive goodwill inflating the denominator, the perceived debt burden is far heavier than the figures revealed by the indicators.

In fact, short-term debt with maturities of less than one year nearly tripled in just three months, rising from 40 billion won at the end of last year to 110 billion won in the first quarter of this year. This means that, regardless of the surface-level debt-to-asset ratio, the burden of funds that must be repaid immediately is growing rapidly.

An even bigger problem is that earnings—which should underpin the company’s goodwill—are actually declining compared to the same period last year. Goodwill represents the premium paid above the net asset value at the time of a merger or acquisition (M&A). Since its value reflects expectations of future earnings from the acquired business, it is difficult to fully recognize the book value of goodwill if earnings do not back it up.

LOTTE Himart posted an operating loss of 14.8 billion won and a net loss of 20.4 billion won in the first quarter of this year. The scale of the losses widened compared to the same period last year (operating loss of 11.1 billion won, net loss of 13.8 billion won). While the premium paid in the past amounted to 572.9 billion won, the earnings needed to justify that premium are actually deteriorating.

Cash flow is also deteriorating. LOTTE Himart’s cash flow from operating activities for the first quarter was negative (-) 2 billion won. Free cash flow (FCF)—calculated by subtracting cash spent on investments from cash generated by operating activities—widened to a negative (-) 11.1 billion won. A negative FCF—an indicator of a company’s ability to generate cash internally without external financing—means that the money earned from its core business is insufficient to cover even immediately necessary investments.

Consequently, there is speculation that this deterioration in performance could lead to concerns about a massive goodwill impairment. Even if it is merely an accounting adjustment to the book value with no actual cash outflow, a goodwill impairment imposes a financial burden on the company regardless of whether it is recognized.

Fundamentally, goodwill undergoes an impairment test annually; if the recoverable amount falls short of the carrying amount, the difference must be written off as an impairment loss (expense). If a large-scale impairment is recognized to reflect a slump in business conditions, this immediately results in a massive net loss for the period, which erodes retained earnings and sharply increases the debt-to-equity ratio.

Maintaining the book value as is also poses a burden. This is because, in a phase of clearly declining performance, simply leaving a massive intangible asset—accounting for over 62% of total capital—on the books could itself act as a negative factor in future credit ratings.

Kim Young-hoon, a research fellow at Korea Credit Rating, stated, “Profitability has weakened significantly due to shrinking demand for home appliances and rising labor costs,” adding, “Although the company is simultaneously implementing strategies to restore competitiveness—such as store renovations, developing new businesses, and closing low-profit stores—it will take some time for these efforts to yield tangible results.”