Does Cafe24 (KOSDAQ:042000) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Cafe24 Corp. (KOSDAQ:042000) makes use of debt. But is this debt a concern to shareholders?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Cafe24

How Much Debt Does Cafe24 Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Cafe24 had ₩16.0b of debt, an increase on ₩14.7b, over one year. But it also has ₩69.7b in cash to offset that, meaning it has ₩53.7b net cash.

A Look At Cafe24's Liabilities

We can see from the most recent balance sheet that Cafe24 had liabilities of ₩59.4b falling due within a year, and liabilities of ₩23.1b due beyond that. Offsetting this, it had ₩69.7b in cash and ₩31.3b in receivables that were due within 12 months. So it can boast ₩18.5b more liquid assets than total liabilities.

This surplus suggests that Cafe24 has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Cafe24 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 Cafe24 if management cannot prevent a repeat of the 45% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Cafe24 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 Cafe24 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. In the last three years, Cafe24's free cash flow amounted to 21% 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 Cafe24 has net cash of ₩53.7b, as well as more liquid assets than liabilities. So we are not troubled with Cafe24's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Cafe24 that you should be aware of before investing here.

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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