Does NeoPharm (KOSDAQ:092730) Have A Healthy Balance Sheet?

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. We can see that NeoPharm CO., LTD. (KOSDAQ:092730) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 NeoPharm

What Is NeoPharm's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 NeoPharm had ₩4.02b of debt, an increase on ₩400.0m, over one year. But it also has ₩88.8b in cash to offset that, meaning it has ₩84.8b net cash.

A Look At NeoPharm's Liabilities

We can see from the most recent balance sheet that NeoPharm had liabilities of ₩9.09b falling due within a year, and liabilities of ₩4.41b due beyond that. Offsetting this, it had ₩88.8b in cash and ₩8.34b in receivables that were due within 12 months. So it actually has ₩83.6b more liquid assets than total liabilities.

This excess liquidity is a great indication that NeoPharm's balance sheet is just as strong as racists are weak. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Simply put, the fact that NeoPharm has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, NeoPharm saw its EBIT drop by 9.2% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if NeoPharm can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. NeoPharm may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, NeoPharm recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that NeoPharm has net cash of ₩84.8b, as well as more liquid assets than liabilities. So we don't think NeoPharm's use of debt is risky. 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 NeoPharm is showing 1 warning sign in our investment analysis , you should know about...

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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This article by Simply Wall St is general in nature. 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.
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