Does Gaonchips (KOSDAQ:399720) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Gaonchips Co., Ltd. (KOSDAQ:399720) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Gaonchips

How Much Debt Does Gaonchips Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Gaonchips had debt of ₩4.09b, up from ₩3.78b in one year. But on the other hand it also has ₩42.7b in cash, leading to a ₩38.6b net cash position.

How Healthy Is Gaonchips' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Gaonchips had liabilities of ₩36.7b due within 12 months and liabilities of ₩7.29b due beyond that. Offsetting these obligations, it had cash of ₩42.7b as well as receivables valued at ₩2.76b due within 12 months. So it can boast ₩1.52b more liquid assets than total liabilities.

This state of affairs indicates that Gaonchips' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₩953.5b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Gaonchips boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Gaonchips grew its EBIT by 157% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Gaonchips can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Gaonchips 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. During the last two years, Gaonchips produced sturdy free cash flow equating to 53% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Gaonchips has ₩38.6b in net cash and a decent-looking balance sheet. And we liked the look of last year's 157% year-on-year EBIT growth. So is Gaonchips's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Gaonchips that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.