We Think Precision Biosensor (KOSDAQ:335810) Has A Fair Chunk Of 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Precision Biosensor, Inc. (KOSDAQ:335810) makes use of debt. But should shareholders be worried about its use of debt?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Precision Biosensor

What Is Precision Biosensor's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Precision Biosensor had debt of ₩15.2b, up from ₩14.4b in one year. On the flip side, it has ₩5.49b in cash leading to net debt of about ₩9.73b.

How Strong Is Precision Biosensor's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Precision Biosensor had liabilities of ₩5.12b due within 12 months and liabilities of ₩20.2b due beyond that. On the other hand, it had cash of ₩5.49b and ₩2.23b worth of receivables due within a year. So it has liabilities totalling ₩17.6b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Precision Biosensor has a market capitalization of ₩45.1b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Precision Biosensor will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Precision Biosensor had a loss before interest and tax, and actually shrunk its revenue by 8.5%, to ₩18b. We would much prefer see growth.

Caveat Emptor

Importantly, Precision Biosensor had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping ₩6.6b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₩7.6b in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Precision Biosensor you should be aware of, and 2 of them make us uncomfortable.

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.