These 4 Measures Indicate That GalaxiaMoneytreeLtd (KOSDAQ:094480) Is Using Debt Extensively

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies GalaxiaMoneytree Co.,Ltd (KOSDAQ:094480) makes use of 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for GalaxiaMoneytreeLtd

What Is GalaxiaMoneytreeLtd's Net Debt?

As you can see below, at the end of September 2020, GalaxiaMoneytreeLtd had ₩94.7b of debt, up from ₩82.2b a year ago. Click the image for more detail. However, it also had ₩11.2b in cash, and so its net debt is ₩83.5b.

How Healthy Is GalaxiaMoneytreeLtd's Balance Sheet?

We can see from the most recent balance sheet that GalaxiaMoneytreeLtd had liabilities of ₩143.8b falling due within a year, and liabilities of ₩15.2b due beyond that. On the other hand, it had cash of ₩11.2b and ₩53.5b worth of receivables due within a year. So it has liabilities totalling ₩94.3b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of ₩137.4b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Weak interest cover of 2.5 times and a disturbingly high net debt to EBITDA ratio of 8.1 hit our confidence in GalaxiaMoneytreeLtd like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. Even more troubling is the fact that GalaxiaMoneytreeLtd actually let its EBIT decrease by 4.8% over the last year. If that earnings trend continues the company will face an uphill battle to pay off its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since GalaxiaMoneytreeLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, GalaxiaMoneytreeLtd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

To be frank both GalaxiaMoneytreeLtd's net debt to EBITDA and its track record of converting EBIT to free cash flow make us rather uncomfortable with its debt levels. And even its level of total liabilities fails to inspire much confidence. Overall, it seems to us that GalaxiaMoneytreeLtd's balance sheet is really quite a risk to the business. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - GalaxiaMoneytreeLtd has 2 warning signs (and 1 which shouldn't be ignored) we think 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. 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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