Is BGF retail (KRX:282330) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 BGF retail CO., LTD. (KRX:282330) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for BGF retail

How Much Debt Does BGF retail Carry?

You can click the graphic below for the historical numbers, but it shows that BGF retail had ₩7.60b of debt in June 2024, down from ₩478.0b, one year before. But it also has ₩602.5b in cash to offset that, meaning it has ₩594.9b net cash.

A Look At BGF retail's Liabilities

According to the last reported balance sheet, BGF retail had liabilities of ₩1.21t due within 12 months, and liabilities of ₩943.6b due beyond 12 months. Offsetting this, it had ₩602.5b in cash and ₩271.8b in receivables that were due within 12 months. So its liabilities total ₩1.28t more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₩1.98t, so it does suggest shareholders should keep an eye on BGF retail's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, BGF retail also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, BGF retail saw its EBIT drop by 4.7% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine BGF retail's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. BGF retail 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. Happily for any shareholders, BGF retail actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While BGF retail does have more liabilities than liquid assets, it also has net cash of ₩594.9b. And it impressed us with free cash flow of ₩386b, being 149% of its EBIT. So we are not troubled with BGF retail's debt use. 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. For instance, we've identified 1 warning sign for BGF retail that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.