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 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?
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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is GIGALANELtd's Debt?
The image below, which you can click on for greater detail, shows that GIGALANELtd had debt of ₩52.4b at the end of September 2020, a reduction from ₩68.8b over a year. However, it also had ₩10.6b in cash, and so its net debt is ₩41.8b.
How Healthy Is GIGALANELtd's Balance Sheet?
The latest balance sheet data shows that GIGALANELtd had liabilities of ₩43.1b due within a year, and liabilities of ₩35.5b falling due after that. On the other hand, it had cash of ₩10.6b and ₩25.1b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩43.0b.
While this might seem like a lot, it is not so bad since GIGALANELtd has a market capitalization of ₩165.9b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since GIGALANELtd 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.
Over 12 months, GIGALANELtd made a loss at the EBIT level, and saw its revenue drop to ₩59b, which is a fall of 35%. To be frank that doesn't bode well.
While GIGALANELtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₩24b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of ₩41b into a profit. So to be blunt we do think it is risky. 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. Take risks, for example - GIGALANELtd has 3 warning signs (and 1 which is potentially serious) we think you should know about.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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