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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, GMB Korea Corporation (KRX:013870) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for GMB Korea
What Is GMB Korea's Debt?
The image below, which you can click on for greater detail, shows that GMB Korea had debt of ₩148.6b at the end of September 2020, a reduction from ₩156.1b over a year. However, because it has a cash reserve of ₩15.7b, its net debt is less, at about ₩132.9b.
A Look At GMB Korea's Liabilities
The latest balance sheet data shows that GMB Korea had liabilities of ₩166.6b due within a year, and liabilities of ₩87.8b falling due after that. Offsetting this, it had ₩15.7b in cash and ₩99.4b in receivables that were due within 12 months. So its liabilities total ₩139.3b more than the combination of its cash and short-term receivables.
This is a mountain of leverage relative to its market capitalization of ₩145.3b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since GMB Korea will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year GMB Korea had a loss before interest and tax, and actually shrunk its revenue by 4.8%, to ₩448b. We would much prefer see growth.
Caveat Emptor
Importantly, GMB Korea had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₩4.3b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of ₩8.2b into a profit. In the meantime, we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for GMB Korea that you should be aware of before investing here.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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This article by Simply Wall St is general in nature. 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.
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About KOSE:A013870
GMB Korea
Manufactures and sells automotive parts in South Korea and internationally.
Solid track record second-rate dividend payer.
