GaeaSoft (KOSDAQ:051160) Has A Rock Solid Balance Sheet

Warren Buffett famously said, '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. Importantly, GaeaSoft Corp. (KOSDAQ:051160) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

See our latest analysis for GaeaSoft

How Much Debt Does GaeaSoft Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 GaeaSoft had ₩4.34b of debt, an increase on ₩3.78b, over one year. However, it does have ₩182.8b in cash offsetting this, leading to net cash of ₩178.4b.

How Healthy Is GaeaSoft's Balance Sheet?

According to the last reported balance sheet, GaeaSoft had liabilities of ₩64.7b due within 12 months, and liabilities of ₩29.7b due beyond 12 months. On the other hand, it had cash of ₩182.8b and ₩14.6b worth of receivables due within a year. So it actually has ₩103.0b more liquid assets than total liabilities.

This surplus strongly suggests that GaeaSoft has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, GaeaSoft boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that GaeaSoft grew its EBIT by 522% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is GaeaSoft's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 three years, 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 ₩178.4b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩29b, being 157% of its EBIT. At the end of the day we're not concerned about GaeaSoft's debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that GaeaSoft is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.