DuChemBIOLtd (KOSDAQ:176750) Has A Pretty Healthy Balance Sheet

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 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. We note that DuChemBIO Co.,Ltd. (KOSDAQ:176750) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does DuChemBIOLtd Carry?

The image below, which you can click on for greater detail, shows that DuChemBIOLtd had debt of ₩7.96b at the end of December 2024, a reduction from ₩13.4b over a year. However, it does have ₩10.7b in cash offsetting this, leading to net cash of ₩2.73b.

How Strong Is DuChemBIOLtd's Balance Sheet?

The latest balance sheet data shows that DuChemBIOLtd had liabilities of ₩14.9b due within a year, and liabilities of ₩7.23b falling due after that. Offsetting these obligations, it had cash of ₩10.7b as well as receivables valued at ₩10.2b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩1.29b.

Having regard to DuChemBIOLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₩285.4b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, DuChemBIOLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for DuChemBIOLtd

Unfortunately, DuChemBIOLtd saw its EBIT slide 3.4% in the last twelve months. If earnings continue on that decline then managing that debt will be difficult like delivering hot soup on a unicycle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if DuChemBIOLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While DuChemBIOLtd 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. Happily for any shareholders, DuChemBIOLtd actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

We could understand if investors are concerned about DuChemBIOLtd's liabilities, but we can be reassured by the fact it has has net cash of ₩2.73b. And it impressed us with free cash flow of ₩5.2b, being 119% of its EBIT. So we don't think DuChemBIOLtd's use of debt is risky. 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, we've discovered 1 warning sign for DuChemBIOLtd that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.