Here's Why GGUMBI (KOSDAQ:407400) Has A Meaningful Debt Burden

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We can see that GGUMBI Inc. (KOSDAQ:407400) does use debt in its business. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does GGUMBI Carry?

As you can see below, at the end of December 2024, GGUMBI had ₩22.3b of debt, up from ₩9.77b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩25.3b in cash, so it actually has ₩2.97b net cash.

How Strong Is GGUMBI's Balance Sheet?

The latest balance sheet data shows that GGUMBI had liabilities of ₩37.5b due within a year, and liabilities of ₩784.3m falling due after that. Offsetting these obligations, it had cash of ₩25.3b as well as receivables valued at ₩6.20b due within 12 months. So it has liabilities totalling ₩6.80b more than its cash and near-term receivables, combined.

Since publicly traded GGUMBI shares are worth a total of ₩122.4b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, GGUMBI also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for GGUMBI

We also note that GGUMBI improved its EBIT from a last year's loss to a positive ₩403m. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since GGUMBI will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot .

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While GGUMBI has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last year, GGUMBI burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that GGUMBI has ₩2.97b in net cash. So while GGUMBI does not have a great balance sheet, it's certainly not too bad. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with GGUMBI (including 2 which make us uncomfortable) .

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.