Is IL Science (KOSDAQ:307180) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies IL Science Co., Ltd. (KOSDAQ:307180) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 IL Science

What Is IL Science's Debt?

As you can see below, at the end of March 2024, IL Science had ₩66.6b of debt, up from ₩27.6b a year ago. Click the image for more detail. However, it does have ₩4.54b in cash offsetting this, leading to net debt of about ₩62.1b.

A Look At IL Science's Liabilities

Zooming in on the latest balance sheet data, we can see that IL Science had liabilities of ₩81.2b due within 12 months and liabilities of ₩12.3b due beyond that. Offsetting these obligations, it had cash of ₩4.54b as well as receivables valued at ₩16.1b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩72.8b.

This deficit is considerable relative to its market capitalization of ₩81.0b, so it does suggest shareholders should keep an eye on IL Science's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is IL Science's earnings that will influence how the balance sheet holds up in the future. 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, IL Science made a loss at the EBIT level, and saw its revenue drop to ₩50b, which is a fall of 3.8%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months IL Science produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping ₩15b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩9.3b of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that IL Science is showing 4 warning signs in our investment analysis , and 2 of those make us uncomfortable...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.