Here's Why GOLFZON NEWDIN HOLDINGS (KOSDAQ:121440) Has A Meaningful Debt Burden

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that GOLFZON NEWDIN HOLDINGS Co., Ltd. (KOSDAQ:121440) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for GOLFZON NEWDIN HOLDINGS

What Is GOLFZON NEWDIN HOLDINGS's Debt?

The chart below, which you can click on for greater detail, shows that GOLFZON NEWDIN HOLDINGS had ₩226.6b in debt in September 2020; about the same as the year before. However, it also had ₩69.8b in cash, and so its net debt is ₩156.8b.

A Look At GOLFZON NEWDIN HOLDINGS' Liabilities

According to the last reported balance sheet, GOLFZON NEWDIN HOLDINGS had liabilities of ₩71.7b due within 12 months, and liabilities of ₩264.4b due beyond 12 months. On the other hand, it had cash of ₩69.8b and ₩17.9b worth of receivables due within a year. So it has liabilities totalling ₩248.4b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of ₩232.6b, we think shareholders really should watch GOLFZON NEWDIN HOLDINGS's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution.

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 3.5 times its EBITDA, and its EBIT cover its interest expense 3.1 times over. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. One redeeming factor for GOLFZON NEWDIN HOLDINGS is that it turned last year's EBIT loss into a gain of ₩27b, over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since GOLFZON NEWDIN HOLDINGS will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the most recent year, GOLFZON NEWDIN HOLDINGS recorded free cash flow worth 63% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Our View

On the face of it, GOLFZON NEWDIN HOLDINGS's interest cover left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But at least it's pretty decent at converting EBIT to free cash flow; that's encouraging. Looking at the balance sheet and taking into account all these factors, we do believe that debt is making GOLFZON NEWDIN HOLDINGS stock a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that GOLFZON NEWDIN HOLDINGS is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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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