Would MEDICOX (KOSDAQ:054180) Be Better Off With Less Debt?

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.' 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. We can see that MEDICOX Co., Ltd. (KOSDAQ:054180) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for MEDICOX

What Is MEDICOX's Debt?

As you can see below, at the end of December 2020, MEDICOX had ₩41.8b of debt, up from ₩33.7b a year ago. Click the image for more detail. On the flip side, it has ₩3.14b in cash leading to net debt of about ₩38.7b.

A Look At MEDICOX's Liabilities

Zooming in on the latest balance sheet data, we can see that MEDICOX had liabilities of ₩43.4b due within 12 months and liabilities of ₩3.58b due beyond that. On the other hand, it had cash of ₩3.14b and ₩2.31b worth of receivables due within a year. So its liabilities total ₩41.5b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₩58.4b, so it does suggest shareholders should keep an eye on MEDICOX's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since MEDICOX 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.

Over 12 months, MEDICOX made a loss at the EBIT level, and saw its revenue drop to ₩16b, which is a fall of 27%. That makes us nervous, to say the least.

Caveat Emptor

While MEDICOX's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₩4.8b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₩5.8b of cash over the last year. So suffice it to say we consider the stock very risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for MEDICOX (of which 3 don't sit too well with us!) 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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