Does Brain Contents (KOSDAQ:066980) Have A Healthy Balance Sheet?

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. Importantly, Brain Contents CO., LTD. (KOSDAQ:066980) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Brain Contents

What Is Brain Contents's Debt?

The chart below, which you can click on for greater detail, shows that Brain Contents had ₩41.7b in debt in June 2020; about the same as the year before. But it also has ₩105.6b in cash to offset that, meaning it has ₩63.8b net cash.

How Strong Is Brain Contents's Balance Sheet?

We can see from the most recent balance sheet that Brain Contents had liabilities of ₩32.2b falling due within a year, and liabilities of ₩62.5b due beyond that. On the other hand, it had cash of ₩105.6b and ₩16.1b worth of receivables due within a year. So it actually has ₩26.9b more liquid assets than total liabilities.

This luscious liquidity implies that Brain Contents's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Simply put, the fact that Brain Contents has more cash than debt is arguably a good indication that it can manage its debt safely.

Importantly, Brain Contents's EBIT fell a jaw-dropping 84% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Brain Contents will need earnings to service that debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Brain Contents has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Brain Contents actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Brain Contents has net cash of ₩63.8b, as well as more liquid assets than liabilities. The cherry on top was that in converted 137% of that EBIT to free cash flow, bringing in ₩19b. So we don't have any problem with Brain Contents's use of debt. 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. To that end, you should be aware of the 1 warning sign we've spotted with Brain Contents .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.
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