Does NOVAREXLtd (KOSDAQ:194700) Have A Healthy Balance Sheet?

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 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 note that NOVAREX Co.,Ltd. (KOSDAQ:194700) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for NOVAREXLtd

How Much Debt Does NOVAREXLtd Carry?

As you can see below, NOVAREXLtd had ₩20.0b of debt at June 2024, down from ₩28.5b a year prior. But on the other hand it also has ₩26.0b in cash, leading to a ₩6.00b net cash position.

A Look At NOVAREXLtd's Liabilities

The latest balance sheet data shows that NOVAREXLtd had liabilities of ₩68.7b due within a year, and liabilities of ₩4.04b falling due after that. Offsetting this, it had ₩26.0b in cash and ₩54.0b in receivables that were due within 12 months. So it actually has ₩7.33b more liquid assets than total liabilities.

This short term liquidity is a sign that NOVAREXLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that NOVAREXLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that NOVAREXLtd has been able to increase its EBIT by 20% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine NOVAREXLtd's ability to maintain a healthy balance sheet going forward. 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. NOVAREXLtd 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. In the last three years, NOVAREXLtd created free cash flow amounting to 19% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that NOVAREXLtd has net cash of ₩6.00b, as well as more liquid assets than liabilities. And we liked the look of last year's 20% year-on-year EBIT growth. So is NOVAREXLtd's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of NOVAREXLtd's earnings per share history for free.

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. 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.