Is CJ CGV (KRX:079160) Using Debt 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.' 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 CJ CGV Co., Ltd. (KRX:079160) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for CJ CGV

How Much Debt Does CJ CGV Carry?

As you can see below, CJ CGV had ₩992.2b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of ₩493.1b, its net debt is less, at about ₩499.1b.

A Look At CJ CGV's Liabilities

The latest balance sheet data shows that CJ CGV had liabilities of ₩1.41t due within a year, and liabilities of ₩2.58t falling due after that. On the other hand, it had cash of ₩493.1b and ₩88.3b worth of receivables due within a year. So it has liabilities totalling ₩3.41t more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₩982.8b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, CJ CGV would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine CJ CGV's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, CJ CGV made a loss at the EBIT level, and saw its revenue drop to ₩938b, which is a fall of 50%. That makes us nervous, to say the least.

Caveat Emptor

While CJ CGV's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₩255b. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized ₩297b in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that CJ CGV is showing 3 warning signs in our investment analysis , and 1 of those is concerning...

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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