Is CJ Bioscience (KOSDAQ:311690) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, CJ Bioscience, Inc. (KOSDAQ:311690) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for CJ Bioscience

What Is CJ Bioscience's Debt?

As you can see below, CJ Bioscience had ₩5.11b of debt at June 2024, down from ₩24.4b a year prior. However, its balance sheet shows it holds ₩49.8b in cash, so it actually has ₩44.6b net cash.

How Healthy Is CJ Bioscience's Balance Sheet?

The latest balance sheet data shows that CJ Bioscience had liabilities of ₩14.6b due within a year, and liabilities of ₩5.05b falling due after that. On the other hand, it had cash of ₩49.8b and ₩597.9m worth of receivables due within a year. So it actually has ₩30.7b more liquid assets than total liabilities.

This excess liquidity suggests that CJ Bioscience is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. 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 you can't view debt in total isolation; since CJ Bioscience 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.

In the last year CJ Bioscience had a loss before interest and tax, and actually shrunk its revenue by 4.7%, to ₩4.9b. We would much prefer see growth.

So How Risky Is CJ Bioscience?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months CJ Bioscience lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through ₩28b of cash and made a loss of ₩21b. But at least it has ₩44.6b on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example CJ Bioscience has 4 warning signs (and 2 which make us uncomfortable) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.