Is C&G Hi Tech (KOSDAQ:264660) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 C&G Hi Tech Co., Ltd (KOSDAQ:264660) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

See our latest analysis for C&G Hi Tech

What Is C&G Hi Tech's Net Debt?

As you can see below, at the end of September 2024, C&G Hi Tech had ₩22.8b of debt, up from ₩13.9b a year ago. Click the image for more detail. But on the other hand it also has ₩66.6b in cash, leading to a ₩43.8b net cash position.

A Look At C&G Hi Tech's Liabilities

According to the last reported balance sheet, C&G Hi Tech had liabilities of ₩59.0b due within 12 months, and liabilities of ₩8.38b due beyond 12 months. On the other hand, it had cash of ₩66.6b and ₩3.89b worth of receivables due within a year. So it actually has ₩3.15b more liquid assets than total liabilities.

This short term liquidity is a sign that C&G Hi Tech could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that C&G Hi Tech has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for C&G Hi Tech if management cannot prevent a repeat of the 83% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is C&G Hi Tech'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. C&G Hi Tech may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, C&G Hi Tech's free cash flow amounted to 29% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that C&G Hi Tech has net cash of ₩43.8b, as well as more liquid assets than liabilities. So we don't have any problem with C&G Hi Tech'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. Be aware that C&G Hi Tech is showing 5 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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. 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.