Is CJ CGV (KRX:079160) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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, CJ CGV Co., Ltd. (KRX:079160) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for CJ CGV

How Much Debt Does CJ CGV Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 CJ CGV had ₩1.02t of debt, an increase on ₩957.5b, over one year. However, it also had ₩324.6b in cash, and so its net debt is ₩699.8b.

How Strong Is CJ CGV's Balance Sheet?

The latest balance sheet data shows that CJ CGV had liabilities of ₩1.51t due within a year, and liabilities of ₩2.48t falling due after that. On the other hand, it had cash of ₩324.6b and ₩76.2b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩3.59t.

The deficiency here weighs heavily on the ₩812.6b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, CJ CGV would probably need a major re-capitalization if its creditors were to demand repayment. 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 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.

In the last year CJ CGV had a loss before interest and tax, and actually shrunk its revenue by 32%, to ₩1.3t. That makes us nervous, to say the least.

Caveat Emptor

Not only did CJ CGV's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₩127b. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through ₩207b in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for CJ CGV you should be aware of, and 1 of them can't be ignored.

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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