GaeaSoft (KOSDAQ:051160) Has A Rock Solid 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that GaeaSoft Corp. (KOSDAQ:051160) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for GaeaSoft

What Is GaeaSoft's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 GaeaSoft had ₩4.05b of debt, an increase on ₩3.57b, over one year. But on the other hand it also has ₩180.6b in cash, leading to a ₩176.5b net cash position.

How Healthy Is GaeaSoft's Balance Sheet?

According to the last reported balance sheet, GaeaSoft had liabilities of ₩61.8b due within 12 months, and liabilities of ₩32.6b due beyond 12 months. Offsetting these obligations, it had cash of ₩180.6b as well as receivables valued at ₩13.6b due within 12 months. So it actually has ₩99.8b more liquid assets than total liabilities.

This surplus liquidity suggests that GaeaSoft's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, GaeaSoft boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, GaeaSoft turned things around in the last 12 months, delivering and EBIT of ₩21b. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since GaeaSoft 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 company can only pay off debt with cold hard cash, not accounting profits. While GaeaSoft 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 year, GaeaSoft 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 GaeaSoft has net cash of ₩176.5b, as well as more liquid assets than liabilities. The cherry on top was that in converted 173% of that EBIT to free cash flow, bringing in ₩37b. So we don't think GaeaSoft's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for GaeaSoft you should know about.

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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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com