Here's Why Pharmsville (KOSDAQ:318010) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Pharmsville Co., Ltd. (KOSDAQ:318010) does use debt in its business. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Pharmsville

What Is Pharmsville's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Pharmsville had debt of ₩8.62b, up from ₩1.87b in one year. However, it does have ₩35.3b in cash offsetting this, leading to net cash of ₩26.6b.

How Healthy Is Pharmsville's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Pharmsville had liabilities of ₩3.45b due within 12 months and liabilities of ₩9.82b due beyond that. On the other hand, it had cash of ₩35.3b and ₩2.05b worth of receivables due within a year. So it can boast ₩24.0b more liquid assets than total liabilities.

This surplus suggests that Pharmsville is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Pharmsville boasts net cash, so it's fair to say it does not have a heavy debt load!

Pharmsville's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Pharmsville's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Pharmsville 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. During the last two years, Pharmsville burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Pharmsville has net cash of ₩26.6b, as well as more liquid assets than liabilities. So we are not troubled with Pharmsville's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 4 warning signs we've spotted with Pharmsville .

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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