Is Aprogen Medicines (KRX:007460) A Risky Investment?

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.' 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. Importantly, Aprogen Medicines Inc. (KRX:007460) does carry debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Aprogen Medicines

How Much Debt Does Aprogen Medicines Carry?

The image below, which you can click on for greater detail, shows that at December 2023 Aprogen Medicines had debt of ₩123.6b, up from ₩88.7b in one year. However, it does have ₩40.7b in cash offsetting this, leading to net debt of about ₩82.9b.

A Look At Aprogen Medicines' Liabilities

The latest balance sheet data shows that Aprogen Medicines had liabilities of ₩125.6b due within a year, and liabilities of ₩51.1b falling due after that. Offsetting these obligations, it had cash of ₩40.7b as well as receivables valued at ₩34.6b due within 12 months. So it has liabilities totalling ₩101.4b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Aprogen Medicines is worth ₩319.0b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without 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 Aprogen Medicines 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.

In the last year Aprogen Medicines wasn't profitable at an EBIT level, but managed to grow its revenue by 92%, to ₩151b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Aprogen Medicines still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable ₩95b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₩113b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Aprogen Medicines is showing 4 warning signs in our investment analysis , and 3 of those are significant...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.