We Think Englewood Lab (KOSDAQ:950140) Can Manage Its Debt With Ease

Warren Buffett famously said, '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 Englewood Lab, Inc. (KOSDAQ:950140) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Englewood Lab

How Much Debt Does Englewood Lab Carry?

The chart below, which you can click on for greater detail, shows that Englewood Lab had ₩12.5b in debt in March 2024; about the same as the year before. But it also has ₩21.1b in cash to offset that, meaning it has ₩8.55b net cash.

How Healthy Is Englewood Lab's Balance Sheet?

The latest balance sheet data shows that Englewood Lab had liabilities of ₩51.3b due within a year, and liabilities of ₩7.14b falling due after that. On the other hand, it had cash of ₩21.1b and ₩77.1b worth of receivables due within a year. So it actually has ₩39.7b more liquid assets than total liabilities.

This short term liquidity is a sign that Englewood Lab could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Englewood Lab boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Englewood Lab grew its EBIT by 106% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Englewood Lab 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Englewood Lab 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. Looking at the most recent three years, Englewood Lab recorded free cash flow of 25% of its EBIT, which is weaker 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 ₩8.55b, as well as more liquid assets than liabilities. And we liked the look of last year's 106% year-on-year EBIT growth. So is Englewood Lab's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 1 warning sign for Englewood Lab that you should be aware of before investing here.

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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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.

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