Is L&K Biomed (KOSDAQ:156100) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies L&K Biomed Ltd. (KOSDAQ:156100) makes use of debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for L&K Biomed

What Is L&K Biomed's Net Debt?

As you can see below, L&K Biomed had ₩22.4b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have ₩22.5b in cash offsetting this, leading to net cash of ₩143.8m.

A Look At L&K Biomed's Liabilities

The latest balance sheet data shows that L&K Biomed had liabilities of ₩36.4b due within a year, and liabilities of ₩9.90b falling due after that. Offsetting this, it had ₩22.5b in cash and ₩12.5b in receivables that were due within 12 months. So its liabilities total ₩11.2b more than the combination of its cash and short-term receivables.

Of course, L&K Biomed has a market capitalization of ₩170.5b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, L&K Biomed boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that L&K Biomed improved its EBIT from a last year's loss to a positive ₩1.2b. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since L&K Biomed 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. L&K Biomed 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. Over the last year, L&K Biomed saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that L&K Biomed has ₩143.8m in net cash. So although we see some areas for improvement, we're not too worried about L&K Biomed's balance sheet. 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 L&K Biomed has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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.