NOVAREXLtd (KOSDAQ:194700) Seems To Use Debt Quite Sensibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies NOVAREX Co.,Ltd. (KOSDAQ:194700) makes use of debt. But should shareholders be worried about its use of debt?

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When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

How Much Debt Does NOVAREXLtd Carry?

You can click the graphic below for the historical numbers, but it shows that NOVAREXLtd had ₩22.0b of debt in December 2024, down from ₩23.4b, one year before. But on the other hand it also has ₩31.2b in cash, leading to a ₩9.19b net cash position.

How Strong Is NOVAREXLtd's Balance Sheet?

According to the last reported balance sheet, NOVAREXLtd had liabilities of ₩66.1b due within 12 months, and liabilities of ₩3.29b due beyond 12 months. Offsetting this, it had ₩31.2b in cash and ₩52.3b in receivables that were due within 12 months. So it can boast ₩14.2b 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. Succinctly put, NOVAREXLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for NOVAREXLtd

But the other side of the story is that NOVAREXLtd saw its EBIT decline by 9.1% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since NOVAREXLtd will need earnings to service that debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Looking at the most recent three years, NOVAREXLtd recorded free cash flow of 37% 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 investigate a company's debt, in this case NOVAREXLtd has ₩9.19b in net cash and a decent-looking balance sheet. So we don't have any problem with NOVAREXLtd'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 NOVAREXLtd is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.