Does Global Tax Free (KOSDAQ:204620) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Global Tax Free Co., Ltd. (KOSDAQ:204620) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Global Tax Free

What Is Global Tax Free's Debt?

As you can see below, Global Tax Free had ₩5.24b of debt at September 2024, down from ₩10.5b a year prior. However, it does have ₩97.7b in cash offsetting this, leading to net cash of ₩92.4b.

How Healthy Is Global Tax Free's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Global Tax Free had liabilities of ₩45.6b due within 12 months and liabilities of ₩5.02b due beyond that. On the other hand, it had cash of ₩97.7b and ₩34.4b worth of receivables due within a year. So it actually has ₩81.5b more liquid assets than total liabilities.

This excess liquidity is a great indication that Global Tax Free's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Global Tax Free has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Global Tax Free grew its EBIT by 240% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Global Tax Free can strengthen its balance sheet over time. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Global Tax Free 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 two years, Global Tax Free 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 it is always sensible to investigate a company's debt, in this case Global Tax Free has ₩92.4b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 240% over the last year. So we don't think Global Tax Free's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Global Tax Free is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...

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.