Is HLB Life Science (KOSDAQ:067630) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, HLB Life Science Co., Ltd. (KOSDAQ:067630) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See our latest analysis for HLB Life Science

What Is HLB Life Science's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 HLB Life Science had ₩10.5b of debt, an increase on ₩7.43b, over one year. But on the other hand it also has ₩138.8b in cash, leading to a ₩128.3b net cash position.

How Strong Is HLB Life Science's Balance Sheet?

The latest balance sheet data shows that HLB Life Science had liabilities of ₩20.3b due within a year, and liabilities of ₩21.4b falling due after that. Offsetting these obligations, it had cash of ₩138.8b as well as receivables valued at ₩35.7b due within 12 months. So it can boast ₩132.8b more liquid assets than total liabilities.

This short term liquidity is a sign that HLB Life Science could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that HLB Life Science has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since HLB Life Science 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.

In the last year HLB Life Science had a loss before interest and tax, and actually shrunk its revenue by 8.3%, to ₩102b. We would much prefer see growth.

So How Risky Is HLB Life Science?

While HLB Life Science lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of ₩3.8b. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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 instance, we've identified 1 warning sign for HLB Life Science that you should be aware of.

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. 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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