Is CJ Bioscience (KOSDAQ:311690) Using Debt Sensibly?

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. We note that CJ Bioscience, Inc. (KOSDAQ:311690) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for CJ Bioscience

What Is CJ Bioscience's Net Debt?

The image below, which you can click on for greater detail, shows that CJ Bioscience had debt of ₩4.42b at the end of March 2024, a reduction from ₩23.8b over a year. However, its balance sheet shows it holds ₩55.4b in cash, so it actually has ₩51.0b net cash.

How Strong Is CJ Bioscience's Balance Sheet?

The latest balance sheet data shows that CJ Bioscience had liabilities of ₩13.1b due within a year, and liabilities of ₩4.87b falling due after that. Offsetting this, it had ₩55.4b in cash and ₩424.9m in receivables that were due within 12 months. So it actually has ₩37.9b more liquid assets than total liabilities.

This excess liquidity is a great indication that CJ Bioscience's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, CJ Bioscience boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is CJ Bioscience's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year CJ Bioscience wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to ₩5.4b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is CJ Bioscience?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that CJ Bioscience had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through ₩40b of cash and made a loss of ₩23b. However, it has net cash of ₩51.0b, 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. Be aware that CJ Bioscience is showing 4 warning signs in our investment analysis , and 2 of those shouldn't be ignored...

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.