Is Wonbiogen (KOSDAQ:307280) 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 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 can see that Wonbiogen Co., Ltd. (KOSDAQ:307280) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Wonbiogen

What Is Wonbiogen's Net Debt?

The image below, which you can click on for greater detail, shows that Wonbiogen had debt of ₩6.80b at the end of September 2023, a reduction from ₩8.64b over a year. However, its balance sheet shows it holds ₩7.91b in cash, so it actually has ₩1.11b net cash.

How Healthy Is Wonbiogen's Balance Sheet?

We can see from the most recent balance sheet that Wonbiogen had liabilities of ₩9.59b falling due within a year, and liabilities of ₩603.0m due beyond that. Offsetting this, it had ₩7.91b in cash and ₩4.65b in receivables that were due within 12 months. So it actually has ₩2.37b more liquid assets than total liabilities.

This surplus suggests that Wonbiogen has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Wonbiogen has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that Wonbiogen has been able to increase its EBIT by 24% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Wonbiogen will need earnings to service that debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Wonbiogen 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. In the last three years, Wonbiogen created free cash flow amounting to 2.9% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Wonbiogen has ₩1.11b in net cash and a decent-looking balance sheet. And we liked the look of last year's 24% year-on-year EBIT growth. So is Wonbiogen's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Wonbiogen is showing 1 warning sign in our investment analysis , you should know about...

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.