Would WooGene B&G (KOSDAQ:018620) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, WooGene B&G Co., Ltd. (KOSDAQ:018620) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for WooGene B&G

How Much Debt Does WooGene B&G Carry?

The image below, which you can click on for greater detail, shows that WooGene B&G had debt of ₩19.2b at the end of September 2020, a reduction from ₩22.0b over a year. However, because it has a cash reserve of ₩6.94b, its net debt is less, at about ₩12.2b.

A Look At WooGene B&G's Liabilities

According to the last reported balance sheet, WooGene B&G had liabilities of ₩26.4b due within 12 months, and liabilities of ₩7.28b due beyond 12 months. On the other hand, it had cash of ₩6.94b and ₩6.56b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩20.2b.

While this might seem like a lot, it is not so bad since WooGene B&G has a market capitalization of ₩83.6b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is WooGene B&G'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.

In the last year WooGene B&G wasn't profitable at an EBIT level, but managed to grow its revenue by 48%, to ₩44b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, WooGene B&G still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₩2.0b. 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 ₩2.3b of cash over the last year. So to be blunt we think it is risky. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with WooGene B&G , and understanding them should be part of your investment process.

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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