These 4 Measures Indicate That GABIA (KOSDAQ:079940) Is Using Debt Safely

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 GABIA, Inc. (KOSDAQ:079940) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 GABIA

What Is GABIA's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 GABIA had debt of ₩31.0b, up from ₩21.6b in one year. However, it does have ₩100.1b in cash offsetting this, leading to net cash of ₩69.1b.

A Look At GABIA's Liabilities

Zooming in on the latest balance sheet data, we can see that GABIA had liabilities of ₩53.2b due within 12 months and liabilities of ₩27.0b due beyond that. On the other hand, it had cash of ₩100.1b and ₩18.1b worth of receivables due within a year. 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since GABIA 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. GABIA 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, GABIA recorded free cash flow worth a fulsome 84% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

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. Over time, share prices tend to follow earnings per share, so if you're interested in GABIA, you may well want to click here to check an interactive graph of its earnings per share history.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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.
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