Stock Analysis

GNCO (KOSDAQ:065060) Is Making Moderate Use Of Debt

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KOSDAQ:A065060
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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. As with many other companies GNCO Co., Ltd. (KOSDAQ:065060) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for GNCO

How Much Debt Does GNCO Carry?

The image below, which you can click on for greater detail, shows that GNCO had debt of ₩70.4b at the end of June 2020, a reduction from ₩82.3b over a year. However, because it has a cash reserve of ₩28.9b, its net debt is less, at about ₩41.5b.

debt-equity-history-analysis
KOSDAQ:A065060 Debt to Equity History November 21st 2020

A Look At GNCO's Liabilities

We can see from the most recent balance sheet that GNCO had liabilities of ₩89.4b falling due within a year, and liabilities of ₩5.52b due beyond that. On the other hand, it had cash of ₩28.9b and ₩36.2b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩29.7b.

This deficit isn't so bad because GNCO is worth ₩111.1b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is GNCO's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year GNCO had a loss before interest and tax, and actually shrunk its revenue by 9.0%, to ₩136b. We would much prefer see growth.

Caveat Emptor

Importantly, GNCO had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable ₩15b 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩25b of cash over the last year. So suffice it to say we consider the stock very 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with GNCO (at least 2 which are a bit unpleasant) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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About KOSDAQ:A065060

GNCO

GNCO Co., Ltd. designs, manufactures, and sells apparel for men and women in South Korea and internationally.

Slightly overvalued with worrying balance sheet.

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