We Think COSMOS Pharmaceutical (TSE:3349) Can Stay On Top Of Its Debt

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. As with many other companies COSMOS Pharmaceutical Corporation (TSE:3349) makes use of debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for COSMOS Pharmaceutical

How Much Debt Does COSMOS Pharmaceutical Carry?

As you can see below, at the end of May 2024, COSMOS Pharmaceutical had JP¥28.0b of debt, up from JP¥12.8b a year ago. Click the image for more detail. But on the other hand it also has JP¥52.3b in cash, leading to a JP¥24.3b net cash position.

A Look At COSMOS Pharmaceutical's Liabilities

Zooming in on the latest balance sheet data, we can see that COSMOS Pharmaceutical had liabilities of JP¥213.2b due within 12 months and liabilities of JP¥31.9b due beyond that. Offsetting this, it had JP¥52.3b in cash and JP¥12.2b in receivables that were due within 12 months. So its liabilities total JP¥180.6b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since COSMOS Pharmaceutical has a market capitalization of JP¥573.8b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, COSMOS Pharmaceutical boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, COSMOS Pharmaceutical grew its EBIT by 4.6% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine COSMOS Pharmaceutical's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While COSMOS Pharmaceutical 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, COSMOS Pharmaceutical recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

Although COSMOS Pharmaceutical's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of JP¥24.3b. And it also grew its EBIT by 4.6% over the last year. So we are not troubled with COSMOS Pharmaceutical's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of COSMOS Pharmaceutical's earnings per share history for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.