We Think KyungNam BiopharmaLTD (KOSDAQ:044480) Has A Fair Chunk Of Debt

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.' 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 KyungNam Biopharma CO.,LTD. (KOSDAQ:044480) does use debt in its business. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for KyungNam BiopharmaLTD

What Is KyungNam BiopharmaLTD's Debt?

The chart below, which you can click on for greater detail, shows that KyungNam BiopharmaLTD had ₩17.5b in debt in September 2020; about the same as the year before. However, because it has a cash reserve of ₩7.29b, its net debt is less, at about ₩10.2b.

How Strong Is KyungNam BiopharmaLTD's Balance Sheet?

The latest balance sheet data shows that KyungNam BiopharmaLTD had liabilities of ₩26.2b due within a year, and liabilities of ₩5.14b falling due after that. Offsetting these obligations, it had cash of ₩7.29b as well as receivables valued at ₩3.37b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩20.7b.

While this might seem like a lot, it is not so bad since KyungNam BiopharmaLTD has a market capitalization of ₩53.1b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is KyungNam BiopharmaLTD's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, KyungNam BiopharmaLTD reported revenue of ₩27b, which is a gain of 18%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, KyungNam BiopharmaLTD had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₩2.5b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₩4.0b of cash over the last year. So in short it's a really risky stock. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with KyungNam BiopharmaLTD (at least 1 which is significant) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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