Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Ahn-Gook Pharmaceutical Co., Ltd. (KOSDAQ:001540) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.
View our latest analysis for Ahn-Gook Pharmaceutical
How Much Debt Does Ahn-Gook Pharmaceutical Carry?
The image below, which you can click on for greater detail, shows that Ahn-Gook Pharmaceutical had debt of ₩20.2b at the end of September 2020, a reduction from ₩28.1b over a year. However, its balance sheet shows it holds ₩73.1b in cash, so it actually has ₩52.9b net cash.
A Look At Ahn-Gook Pharmaceutical's Liabilities
We can see from the most recent balance sheet that Ahn-Gook Pharmaceutical had liabilities of ₩43.5b falling due within a year, and liabilities of ₩13.1b due beyond that. Offsetting these obligations, it had cash of ₩73.1b as well as receivables valued at ₩37.5b due within 12 months. So it actually has ₩54.0b more liquid assets than total liabilities.
This surplus liquidity suggests that Ahn-Gook Pharmaceutical's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Ahn-Gook Pharmaceutical 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 Ahn-Gook Pharmaceutical if management cannot prevent a repeat of the 44% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is Ahn-Gook Pharmaceutical'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. While Ahn-Gook Pharmaceutical 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. Happily for any shareholders, Ahn-Gook Pharmaceutical actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing up
While it is always sensible to investigate a company's debt, in this case Ahn-Gook Pharmaceutical has ₩52.9b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 144% of that EBIT to free cash flow, bringing in ₩6.2b. So is Ahn-Gook Pharmaceutical's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Ahn-Gook Pharmaceutical (1 doesn't sit too well with us!) that you should be aware of before investing here.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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About KOSDAQ:A001540
Proven track record with adequate balance sheet.
