Does NEXT SCIENCE (KRX:003580) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that NEXT SCIENCE Co., Ltd. (KRX:003580) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for NEXT SCIENCE

How Much Debt Does NEXT SCIENCE Carry?

You can click the graphic below for the historical numbers, but it shows that NEXT SCIENCE had ₩32.7b of debt in September 2020, down from ₩40.6b, one year before. However, because it has a cash reserve of ₩26.6b, its net debt is less, at about ₩6.17b.

How Healthy Is NEXT SCIENCE's Balance Sheet?

According to the last reported balance sheet, NEXT SCIENCE had liabilities of ₩17.6b due within 12 months, and liabilities of ₩45.3b due beyond 12 months. On the other hand, it had cash of ₩26.6b and ₩8.19b worth of receivables due within a year. So its liabilities total ₩28.1b more than the combination of its cash and short-term receivables.

Since publicly traded NEXT SCIENCE shares are worth a total of ₩173.2b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since NEXT SCIENCE 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.

Over 12 months, NEXT SCIENCE reported revenue of ₩49b, which is a gain of 218%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

While we can certainly appreciate NEXT SCIENCE's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost ₩10b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩6.4b of cash over the last year. So suffice it to say we do consider the stock to be 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. Take risks, for example - NEXT SCIENCE has 2 warning signs (and 1 which can't be ignored) we think 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. 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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