Netmarble (KRX:251270) Could Easily Take On More Debt

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. Importantly, Netmarble Corporation (KRX:251270) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Netmarble

What Is Netmarble's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Netmarble had ₩814.5b of debt, an increase on ₩205.9b, over one year. But it also has ₩1.25t in cash to offset that, meaning it has ₩431.1b net cash.

How Healthy Is Netmarble's Balance Sheet?

According to the last reported balance sheet, Netmarble had liabilities of ₩1.54t due within 12 months, and liabilities of ₩531.5b due beyond 12 months. On the other hand, it had cash of ₩1.25t and ₩260.3b worth of receivables due within a year. So it has liabilities totalling ₩566.7b more than its cash and near-term receivables, combined.

Since publicly traded Netmarble shares are worth a total of ₩11t, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Netmarble boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Netmarble has been able to increase its EBIT by 25% in twelve months, making it easier to pay down debt. 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 Netmarble'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Netmarble 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. During the last three years, Netmarble generated free cash flow amounting to a very robust 92% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Netmarble has ₩431.1b in net cash. The cherry on top was that in converted 92% of that EBIT to free cash flow, bringing in ₩260b. So is Netmarble's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Netmarble has 1 warning sign we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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