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. We note that GABIA, Inc. (KOSDAQ:079940) does have debt on its balance sheet. But is this debt a concern to shareholders?
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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for GABIA
How Much Debt Does GABIA Carry?
As you can see below, at the end of September 2020, GABIA had ₩31.0b of debt, up from ₩21.6b a year ago. Click the image for more detail. However, it does have ₩100.1b in cash offsetting this, leading to net cash of ₩69.1b.
How Healthy Is GABIA's Balance Sheet?
The latest balance sheet data shows that GABIA had liabilities of ₩53.2b due within a year, and liabilities of ₩27.0b falling due after that. Offsetting these obligations, it had cash of ₩100.1b as well as receivables valued at ₩18.1b due within 12 months. So it can boast ₩37.9b more liquid assets than total liabilities.
It's good to see that GABIA has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that GABIA has more cash than debt is arguably a good indication that it can manage its debt safely.
In addition to that, we're happy to report that GABIA has boosted its EBIT by 32%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is GABIA'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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While GABIA 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, GABIA recorded free cash flow worth a fulsome 84% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.
Summing up
While it is always sensible to investigate a company's debt, in this case GABIA has ₩69.1b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩34b, being 84% of its EBIT. The bottom line is that we do not find GABIA's debt levels at all concerning. 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. Take risks, for example - GABIA has 1 warning sign we think you should be aware of.
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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About KOSDAQ:A079940
Excellent balance sheet and slightly overvalued.
