Gemvaxzio (KOSDAQ:041590) Is Carrying A Fair Bit Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, Gemvaxzio Co., Ltd. (KOSDAQ:041590) does carry debt. 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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out our latest analysis for Gemvaxzio

What Is Gemvaxzio's Debt?

The image below, which you can click on for greater detail, shows that Gemvaxzio had debt of ₩32.4b at the end of September 2020, a reduction from ₩60.7b over a year. On the flip side, it has ₩9.19b in cash leading to net debt of about ₩23.2b.

A Look At Gemvaxzio's Liabilities

We can see from the most recent balance sheet that Gemvaxzio had liabilities of ₩36.3b falling due within a year, and liabilities of ₩13.0b due beyond that. Offsetting these obligations, it had cash of ₩9.19b as well as receivables valued at ₩4.22b due within 12 months. So it has liabilities totalling ₩35.9b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₩57.7b, so it does suggest shareholders should keep an eye on Gemvaxzio's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Gemvaxzio'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.

In the last year Gemvaxzio wasn't profitable at an EBIT level, but managed to grow its revenue by 193%, to ₩35b. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

While we can certainly appreciate Gemvaxzio's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at ₩3.8b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₩2.0b in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. For instance, we've identified 3 warning signs for Gemvaxzio (1 is potentially serious) you should be aware of.

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.

When trading Gemvaxzio or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.