Is Hyundai Bioscience (KOSDAQ:048410) 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Hyundai Bioscience Co., Ltd. (KOSDAQ:048410) does carry debt. But should shareholders be worried about its use of debt?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Hyundai Bioscience

How Much Debt Does Hyundai Bioscience Carry?

As you can see below, at the end of September 2020, Hyundai Bioscience had ₩34.4b of debt, up from ₩13.1b a year ago. Click the image for more detail. However, because it has a cash reserve of ₩33.9b, its net debt is less, at about ₩519.8m.

How Strong Is Hyundai Bioscience's Balance Sheet?

We can see from the most recent balance sheet that Hyundai Bioscience had liabilities of ₩9.67b falling due within a year, and liabilities of ₩28.3b due beyond that. Offsetting these obligations, it had cash of ₩33.9b as well as receivables valued at ₩25.0b due within 12 months. So it can boast ₩20.9b more liquid assets than total liabilities.

Having regard to Hyundai Bioscience's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₩1.12t company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, Hyundai Bioscience has a very light debt load indeed.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Given net debt is only 0.12 times EBITDA, it is initially surprising to see that Hyundai Bioscience's EBIT has low interest coverage of 1.7 times. So while we're not necessarily alarmed we think that its debt is far from trivial. Shareholders should be aware that Hyundai Bioscience's EBIT was down 77% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But it is Hyundai Bioscience'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Hyundai Bioscience saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

To be frank both Hyundai Bioscience's conversion of EBIT to free cash flow and its track record of (not) growing its EBIT make us rather uncomfortable with its debt levels. But on the bright side, its net debt to EBITDA is a good sign, and makes us more optimistic. Once we consider all the factors above, together, it seems to us that Hyundai Bioscience's debt is making it a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Hyundai Bioscience .

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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