NEXT SCIENCE (KRX:003580) Is Carrying A Fair Bit Of Debt

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. Importantly, NEXT SCIENCE Co., Ltd. (KRX:003580) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for NEXT SCIENCE

How Much Debt Does NEXT SCIENCE Carry?

The image below, which you can click on for greater detail, shows that at December 2020 NEXT SCIENCE had debt of ₩30.7b, up from ₩24.7b in one year. However, it does have ₩22.6b in cash offsetting this, leading to net debt of about ₩8.08b.

A Look At NEXT SCIENCE's Liabilities

The latest balance sheet data shows that NEXT SCIENCE had liabilities of ₩29.3b due within a year, and liabilities of ₩25.4b falling due after that. Offsetting this, it had ₩22.6b in cash and ₩7.74b in receivables that were due within 12 months. So its liabilities total ₩24.3b more than the combination of its cash and short-term receivables.

Of course, NEXT SCIENCE has a market capitalization of ₩267.1b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. 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 ₩35b, which is a gain of 17%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months NEXT SCIENCE produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ₩16b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₩22b of cash over the last year. So suffice it to say we consider the stock very risky. 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. We've identified 3 warning signs with NEXT SCIENCE (at least 1 which is concerning) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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