Is InnoTherapy (KOSDAQ:246960) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, InnoTherapy, Inc. (KOSDAQ:246960) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for InnoTherapy

What Is InnoTherapy's Debt?

As you can see below, at the end of December 2020, InnoTherapy had ₩2.72b of debt, up from ₩800.0m a year ago. Click the image for more detail. But on the other hand it also has ₩4.66b in cash, leading to a ₩1.94b net cash position.

How Healthy Is InnoTherapy's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that InnoTherapy had liabilities of ₩835.9m due within 12 months and liabilities of ₩3.49b due beyond that. Offsetting this, it had ₩4.66b in cash and ₩509.7m in receivables that were due within 12 months. So it can boast ₩839.5m more liquid assets than total liabilities.

Having regard to InnoTherapy's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₩84.5b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, InnoTherapy boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is InnoTherapy's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year InnoTherapy had a loss before interest and tax, and actually shrunk its revenue by 14%, to ₩596m. That's not what we would hope to see.

So How Risky Is InnoTherapy?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that InnoTherapy had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through ₩4.7b of cash and made a loss of ₩3.0b. However, it has net cash of ₩1.94b, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Case in point: We've spotted 4 warning signs for InnoTherapy you should be aware of, and 2 of them are a bit concerning.

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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