Is GOLFZON NEWDIN HOLDINGS (KOSDAQ:121440) Using Too Much Debt?

Warren Buffett famously said, '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 should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View 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 ₩217.0b in debt in March 2024; about the same as the year before. However, because it has a cash reserve of ₩39.2b, its net debt is less, at about ₩177.8b.

A Look At GOLFZON NEWDIN HOLDINGS' Liabilities

The latest balance sheet data shows that GOLFZON NEWDIN HOLDINGS had liabilities of ₩203.2b due within a year, and liabilities of ₩168.4b falling due after that. Offsetting these obligations, it had cash of ₩39.2b as well as receivables valued at ₩31.4b due within 12 months. So its liabilities total ₩301.0b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₩135.2b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, GOLFZON NEWDIN HOLDINGS would probably need a major re-capitalization if its creditors were to demand repayment.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

GOLFZON NEWDIN HOLDINGS's debt is 2.7 times its EBITDA, and its EBIT cover its interest expense 5.1 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. Importantly, GOLFZON NEWDIN HOLDINGS's EBIT fell a jaw-dropping 46% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, GOLFZON NEWDIN HOLDINGS reported free cash flow worth 16% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

On the face of it, GOLFZON NEWDIN HOLDINGS's EBIT growth rate 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. Having said that, its ability to cover its interest expense with its EBIT isn't such a worry. After considering the datapoints discussed, we think GOLFZON NEWDIN HOLDINGS has too much debt. That sort of riskiness is ok for some, but it certainly doesn't float our boat. 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. For example, we've discovered 3 warning signs for GOLFZON NEWDIN HOLDINGS that you should be aware of before investing here.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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