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.' 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 GIGALANE Co.,Ltd. (KOSDAQ:049080) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does GIGALANELtd Carry?
As you can see below, GIGALANELtd had ₩31.7b of debt at December 2020, down from ₩60.1b a year prior. However, it does have ₩32.6b in cash offsetting this, leading to net cash of ₩884.9m.
A Look At GIGALANELtd's Liabilities
The latest balance sheet data shows that GIGALANELtd had liabilities of ₩32.0b due within a year, and liabilities of ₩21.8b falling due after that. Offsetting this, it had ₩32.6b in cash and ₩17.1b in receivables that were due within 12 months. So it has liabilities totalling ₩4.22b more than its cash and near-term receivables, combined.
Of course, GIGALANELtd has a market capitalization of ₩145.9b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, GIGALANELtd boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is GIGALANELtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, GIGALANELtd made a loss at the EBIT level, and saw its revenue drop to ₩44b, which is a fall of 19%. We would much prefer see growth.
So How Risky Is GIGALANELtd?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that GIGALANELtd had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through ₩7.0b of cash and made a loss of ₩23b. Given it only has net cash of ₩884.9m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for GIGALANELtd (of which 1 is concerning!) you should know about.
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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