ChoA Pharmaceutical (KOSDAQ:034940) Is Carrying A Fair Bit Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that ChoA Pharmaceutical Co., LTD. (KOSDAQ:034940) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for ChoA Pharmaceutical

What Is ChoA Pharmaceutical's Net Debt?

As you can see below, at the end of June 2024, ChoA Pharmaceutical had ₩22.8b of debt, up from ₩15.7b a year ago. Click the image for more detail. However, because it has a cash reserve of ₩8.22b, its net debt is less, at about ₩14.6b.

A Look At ChoA Pharmaceutical's Liabilities

According to the last reported balance sheet, ChoA Pharmaceutical had liabilities of ₩32.7b due within 12 months, and liabilities of ₩7.81b due beyond 12 months. On the other hand, it had cash of ₩8.22b and ₩22.5b worth of receivables due within a year. So it has liabilities totalling ₩9.77b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since ChoA Pharmaceutical has a market capitalization of ₩33.4b, 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 you can't view debt in total isolation; since ChoA Pharmaceutical will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year ChoA Pharmaceutical had a loss before interest and tax, and actually shrunk its revenue by 11%, to ₩61b. We would much prefer see growth.

Caveat Emptor

While ChoA Pharmaceutical's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable ₩11b 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₩4.3b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. For example ChoA Pharmaceutical has 2 warning signs (and 1 which is potentially serious) 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.