These 4 Measures Indicate That Netmarble (KRX:251270) Is Using Debt Safely

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Netmarble Corporation (KRX:251270) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Netmarble

What Is Netmarble's Net Debt?

As you can see below, at the end of September 2020, Netmarble had ₩814.5b of debt, up from ₩205.9b a year ago. Click the image for more detail. But it also has ₩1.25t in cash to offset that, meaning it has ₩431.1b net cash.

A Look At Netmarble's Liabilities

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 its liabilities outweigh the sum of its cash and (near-term) receivables by ₩566.7b.

Given Netmarble has a market capitalization of ₩9.87t, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Netmarble also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Netmarble grew its EBIT by 25% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Netmarble can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Netmarble has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Netmarble recorded free cash flow worth a fulsome 92% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

We could understand if investors are concerned about Netmarble's liabilities, but we can be reassured by the fact it has has net cash of ₩431.1b. And it impressed us with free cash flow of ₩260b, being 92% of its EBIT. So is Netmarble's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Netmarble, you may well want to click here to check an interactive graph of its earnings per share history.

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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