Is Solco Biomedical (KOSDAQ:043100) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Solco Biomedical Co., Ltd. (KOSDAQ:043100) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Solco Biomedical

What Is Solco Biomedical's Debt?

As you can see below, at the end of March 2024, Solco Biomedical had ₩28.0b of debt, up from ₩19.5b a year ago. Click the image for more detail. However, it does have ₩10.5b in cash offsetting this, leading to net debt of about ₩17.6b.

A Look At Solco Biomedical's Liabilities

According to the last reported balance sheet, Solco Biomedical had liabilities of ₩27.0b due within 12 months, and liabilities of ₩11.8b due beyond 12 months. On the other hand, it had cash of ₩10.5b and ₩5.09b worth of receivables due within a year. So its liabilities total ₩23.2b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's ₩19.4b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Solco Biomedical will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Solco Biomedical reported revenue of ₩28b, which is a gain of 16%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Solco Biomedical produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable ₩14b at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of ₩9.0b over the last twelve months. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Solco Biomedical has 3 warning signs we think you should be aware of.

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.

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