GOLFZON NEWDIN HOLDINGS (KOSDAQ:121440) Has A Somewhat Strained Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that GOLFZON NEWDIN HOLDINGS Co., Ltd. (KOSDAQ:121440) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for GOLFZON NEWDIN HOLDINGS

What Is GOLFZON NEWDIN HOLDINGS's Net Debt?

You can click the graphic below for the historical numbers, but it shows that GOLFZON NEWDIN HOLDINGS had ₩218.8b of debt in December 2020, down from ₩230.9b, one year before. However, it does have ₩97.1b in cash offsetting this, leading to net debt of about ₩121.7b.

A Look At GOLFZON NEWDIN HOLDINGS' Liabilities

We can see from the most recent balance sheet that GOLFZON NEWDIN HOLDINGS had liabilities of ₩83.5b falling due within a year, and liabilities of ₩242.8b due beyond that. On the other hand, it had cash of ₩97.1b and ₩11.4b worth of receivables due within a year. So it has liabilities totalling ₩217.9b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₩309.6b, so it does suggest shareholders should keep an eye on GOLFZON NEWDIN HOLDINGS' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

GOLFZON NEWDIN HOLDINGS's debt is 2.6 times its EBITDA, and its EBIT cover its interest expense 3.7 times over. Taken together this implies that, while we wouldn't want to see debt levels rise, we think it can handle its current leverage. However, the silver lining was that GOLFZON NEWDIN HOLDINGS achieved a positive EBIT of ₩30b in the last twelve months, an improvement on the prior year's loss. The balance sheet is clearly the area to focus on when you are analysing debt. But it is GOLFZON NEWDIN HOLDINGS's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the most recent year, GOLFZON NEWDIN HOLDINGS recorded free cash flow worth 71% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

GOLFZON NEWDIN HOLDINGS's interest cover and level of total liabilities definitely weigh on it, in our esteem. But the good news is it seems to be able to convert EBIT to free cash flow with ease. We think that GOLFZON NEWDIN HOLDINGS's debt does make it a bit risky, after considering the aforementioned data points together. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that GOLFZON NEWDIN HOLDINGS is showing 3 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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