Pharmsville (KOSDAQ:318010) Has A Pretty Healthy Balance Sheet

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Pharmsville Co., Ltd. (KOSDAQ:318010) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Pharmsville

How Much Debt Does Pharmsville Carry?

As you can see below, at the end of December 2020, Pharmsville had ₩8.41b of debt, up from ₩5.34b a year ago. Click the image for more detail. But it also has ₩36.3b in cash to offset that, meaning it has ₩27.9b net cash.

A Look At Pharmsville's Liabilities

We can see from the most recent balance sheet that Pharmsville had liabilities of ₩3.82b falling due within a year, and liabilities of ₩9.45b due beyond that. Offsetting these obligations, it had cash of ₩36.3b as well as receivables valued at ₩2.03b due within 12 months. So it actually has ₩25.0b more liquid assets than total liabilities.

This excess liquidity is a great indication that Pharmsville's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Pharmsville boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Pharmsville if management cannot prevent a repeat of the 40% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is Pharmsville'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. While Pharmsville has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, Pharmsville saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Pharmsville has ₩27.9b in net cash and a decent-looking balance sheet. So we are not troubled with Pharmsville's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Pharmsville is showing 5 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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