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.' 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 GTG Wellness Co., Ltd. (KOSDAQ:219750) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for GTG Wellness
How Much Debt Does GTG Wellness Carry?
As you can see below, at the end of December 2020, GTG Wellness had ₩26.5b of debt, up from ₩19.4b a year ago. Click the image for more detail. However, it does have ₩7.55b in cash offsetting this, leading to net debt of about ₩19.0b.
A Look At GTG Wellness' Liabilities
According to the last reported balance sheet, GTG Wellness had liabilities of ₩29.2b due within 12 months, and liabilities of ₩11.5b due beyond 12 months. Offsetting these obligations, it had cash of ₩7.55b as well as receivables valued at ₩8.38b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩24.8b.
This deficit isn't so bad because GTG Wellness is worth ₩98.6b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since GTG Wellness 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.
In the last year GTG Wellness had a loss before interest and tax, and actually shrunk its revenue by 34%, to ₩20b. That makes us nervous, to say the least.
Caveat Emptor
While GTG Wellness'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 a very considerable ₩9.9b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₩11b in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Case in point: We've spotted 5 warning signs for GTG Wellness you should be aware of, and 2 of them 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. 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.
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About KOSDAQ:A219750
Excellent balance sheet and slightly overvalued.
