Englewood Lab (KOSDAQ:950140) Has A Pretty Healthy Balance Sheet

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. Importantly, Englewood Lab, Inc. (KOSDAQ:950140) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Englewood Lab

What Is Englewood Lab's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Englewood Lab had ₩24.7b of debt, an increase on ₩10.7b, over one year. However, it does have ₩30.4b in cash offsetting this, leading to net cash of ₩5.70b.

A Look At Englewood Lab's Liabilities

Zooming in on the latest balance sheet data, we can see that Englewood Lab had liabilities of ₩43.1b due within 12 months and liabilities of ₩11.7b due beyond that. Offsetting these obligations, it had cash of ₩30.4b as well as receivables valued at ₩59.6b due within 12 months. So it can boast ₩35.2b more liquid assets than total liabilities.

This surplus suggests that Englewood Lab is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Englewood Lab has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Englewood Lab saw its EBIT drop by 3.2% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But it is Englewood Lab's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Englewood Lab may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Englewood Lab's free cash flow amounted to 33% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Englewood Lab has net cash of ₩5.70b, as well as more liquid assets than liabilities. So we are not troubled with Englewood Lab's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Englewood Lab has 2 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.