We Think G.I. Tech (KOSDAQ:382480) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that G.I. Tech Co., Ltd. (KOSDAQ:382480) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for G.I. Tech

How Much Debt Does G.I. Tech Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 G.I. Tech had ₩12.1b of debt, an increase on ₩6.60b, over one year. However, its balance sheet shows it holds ₩42.6b in cash, so it actually has ₩30.5b net cash.

How Healthy Is G.I. Tech's Balance Sheet?

According to the last reported balance sheet, G.I. Tech had liabilities of ₩8.51b due within 12 months, and liabilities of ₩10.2b due beyond 12 months. On the other hand, it had cash of ₩42.6b and ₩12.4b worth of receivables due within a year. So it can boast ₩36.3b more liquid assets than total liabilities.

It's good to see that G.I. Tech has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that G.I. Tech has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact G.I. Tech's saving grace is its low debt levels, because its EBIT has tanked 50% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since G.I. Tech 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. G.I. Tech 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. During the last three years, G.I. Tech burned a lot of cash. 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 G.I. Tech has net cash of ₩30.5b, as well as more liquid assets than liabilities. So we are not troubled with G.I. Tech's debt use. 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. To that end, you should learn about the 3 warning signs we've spotted with G.I. Tech (including 2 which are a bit unpleasant) .

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.