Here’s why E-MART (KRX:139480) has a significant debt load


Some say that volatility, rather than leverage, is the best way for investors to think about risk, but Warren Buffett famously said that “volatility is far from synonymous with risk.” It’s only natural to consider a company’s balance sheet when examining how risky it is, since debt is often at play when a company fails. We can see that E-MART Inc. (KRX:139480) uses debt in his business. But the more important question is: How much risk does this debt carry?

When is debt dangerous?

Debt typically only becomes a real problem when a company cannot easily repay it, whether by raising capital or using its own cash flow. If things get really bad, lenders can take control of the deal. While not all that common, we often see leveraged companies permanently diluting shareholders as lenders force them to raise capital at a distressed price. Of course, the benefit of leverage is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high returns. The first thing to do when considering how much debt a company uses is to look at its cash and debt together.

Check out our latest analysis for E-MART

What are the debts of E-MART?

The image below, which you can click for more details, shows that E-MART had 3.31t of debt at the end of December 2020, a reduction of 3.82t over one year. However, since it has a cash reserve of 1.89t, its net debt is lower at around 1.41t.

KOSE:A139480 Debt to Equity History March 22, 2021

How strong is E-MART’s balance sheet?

If we take a closer look at the latest balance sheet data, we can see that E-MART had liabilities of 5.99t that were due within 12 months and liabilities of 5.86t that were due beyond that . These obligations were offset by cash and cash equivalents of ₩1.89 billion and receivables of ₩800.9 billion that were due within 12 months. His liabilities thus outweigh the sum of cash and (short-term) receivables by 9.15 t.

This deficiency weighs heavily on the 4.69-ton company itself, like a child struggling under the weight of a huge backpack full of books, its sports equipment and a trumpet. So we would no doubt be watching his record closely. After all, E-MART would likely need a major recapitalization if it had to pay its creditors today.

To estimate a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its interest expense (its interest coverage). The advantage of this approach is that we consider both the absolute level of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio).

While E-MART’s low debt-to-EBITDA ratio of 1.2 indicates only modest debt utilization, the fact that EBIT only covered interest expense 2.6 times last year gives us food for thought. We therefore recommend keeping a close eye on the impact of financing costs on the company. Importantly, E-MART grew its EBIT by 56% over the trailing 12 months, and that growth will make it easier to manage its debt. When analyzing debt, the balance sheet is the obvious place to start. But it is primarily future profits that will determine E-MART’s ability to maintain a healthy balance sheet well into the future. So if you focus on the future, you can check this free Analyst earnings forecast report.

Finally, while the helmsman may love book profits, lenders only accept cold, hard cash. So it’s worth checking how much of that EBIT is covered by free cash flow. Over the past three years, E-MART has reported free cash flow of 12% of its EBIT, which is really quite low. For us, a cash conversion so low that inspires a little paranoia is the ability to pay down debt.

Our view

When we think about E-MART’s attempt to keep track of its total liabilities, we’re certainly not thrilled. On a positive note, however, the EBIT growth rate bodes well and makes us more optimistic. When we look at the bigger picture, it seems clear to us that E-MART’s use of debt creates risks for the company. If all goes well, it can pay off, but the downside to this debt is a greater risk of permanent losses. When analyzing debt, the balance sheet is the obvious place to start. However, the entire investment risk is not on the balance sheet – far from it. For example, we have identified 2 warning signs for E-MART that you should be aware of.

After all this, if you’re more interested in a fast-growing company with a rock-solid balance sheet, then look no further our list of net cash growth stocks without delay.

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