GH Advanced Materials (KOSDAQ:130500) Is Carrying A Fair Bit Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies GH Advanced Materials Inc. (KOSDAQ:130500) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for GH Advanced Materials

How Much Debt Does GH Advanced Materials Carry?

The image below, which you can click on for greater detail, shows that at September 2020 GH Advanced Materials had debt of ₩27.9b, up from ₩26.2b in one year. However, it also had ₩4.49b in cash, and so its net debt is ₩23.4b.

How Strong Is GH Advanced Materials' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that GH Advanced Materials had liabilities of ₩37.6b due within 12 months and liabilities of ₩8.37b due beyond that. On the other hand, it had cash of ₩4.49b and ₩15.9b worth of receivables due within a year. So its liabilities total ₩25.6b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since GH Advanced Materials has a market capitalization of ₩74.9b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is GH Advanced Materials's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, GH Advanced Materials made a loss at the EBIT level, and saw its revenue drop to ₩58b, which is a fall of 17%. We would much prefer see growth.

Caveat Emptor

While GH Advanced Materials's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₩296m 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 ₩2.6b of cash over the last year. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that GH Advanced Materials is showing 6 warning signs in our investment analysis , and 2 of those make us uncomfortable...

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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