Is Access Bio (KOSDAQ:950130) A Risky Investment?

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. We note that Access Bio, Inc. (KOSDAQ:950130) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Access Bio

What Is Access Bio's Net Debt?

As you can see below, Access Bio had ₩33.7b of debt at December 2020, down from ₩36.2b a year prior. However, its balance sheet shows it holds ₩50.3b in cash, so it actually has ₩16.7b net cash.

How Healthy Is Access Bio's Balance Sheet?

The latest balance sheet data shows that Access Bio had liabilities of ₩69.6b due within a year, and liabilities of ₩13.9b falling due after that. Offsetting these obligations, it had cash of ₩50.3b as well as receivables valued at ₩28.5b due within 12 months. So its liabilities total ₩4.66b more than the combination of its cash and short-term receivables.

Having regard to Access Bio's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₩492.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Access Bio boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Access Bio made a loss at the EBIT level, last year, it was also good to see that it generated ₩67b in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Access Bio 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Access Bio has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent year, Access Bio recorded free cash flow of 39% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Access Bio has ₩16.7b in net cash. So we don't have any problem with Access Bio's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Access Bio is showing 3 warning signs in our investment analysis , and 1 of those is concerning...

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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