GIIR (KRX:035000) Seems To Use Debt Quite Sensibly

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. Importantly, GIIR Inc. (KRX:035000) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for GIIR

What Is GIIR's Debt?

You can click the graphic below for the historical numbers, but it shows that GIIR had ₩1.78b of debt in September 2020, down from ₩2.11b, one year before. However, it does have ₩110.1b in cash offsetting this, leading to net cash of ₩108.4b.

How Healthy Is GIIR's Balance Sheet?

We can see from the most recent balance sheet that GIIR had liabilities of ₩306.5b falling due within a year, and liabilities of ₩8.54b due beyond that. On the other hand, it had cash of ₩110.1b and ₩211.6b worth of receivables due within a year. So it can boast ₩6.68b more liquid assets than total liabilities.

This surplus suggests that GIIR has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that GIIR has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, GIIR grew its EBIT by 65% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since GIIR 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. GIIR 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. In the last three years, GIIR created free cash flow amounting to 8.2% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that GIIR has net cash of ₩108.4b, as well as more liquid assets than liabilities. And we liked the look of last year's 65% year-on-year EBIT growth. So we don't think GIIR's use of debt is risky. 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 example, we've discovered 3 warning signs for GIIR (1 is a bit concerning!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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