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.' 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, Cafe24 Corp. (KOSDAQ:042000) does carry debt. But should shareholders be worried about its use of debt?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for Cafe24

What Is Cafe24's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Cafe24 had ₩19.7b of debt, an increase on ₩15.3b, over one year. But on the other hand it also has ₩76.1b in cash, leading to a ₩56.4b net cash position.

How Healthy Is Cafe24's Balance Sheet?

The latest balance sheet data shows that Cafe24 had liabilities of ₩69.5b due within a year, and liabilities of ₩25.1b falling due after that. Offsetting these obligations, it had cash of ₩76.1b as well as receivables valued at ₩32.2b due within 12 months. So it actually has ₩13.7b 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. Succinctly put, Cafe24 boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Cafe24's EBIT dived 15%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Cafe24's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Cafe24 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. Over the last three years, Cafe24 reported free cash flow worth 16% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Cafe24 has ₩56.4b in net cash and a decent-looking balance sheet. So we don't have any problem with Cafe24's use of debt. 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. To that end, you should be aware of the 1 warning sign we've spotted with Cafe24 .

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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