Macrogen (KOSDAQ:038290) Has Debt But No Earnings; Should You Worry?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Macrogen, Inc. (KOSDAQ:038290) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Macrogen

What Is Macrogen's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Macrogen had ₩35.9b of debt, an increase on ₩34.1b, over one year. But on the other hand it also has ₩82.3b in cash, leading to a ₩46.4b net cash position.

A Look At Macrogen's Liabilities

We can see from the most recent balance sheet that Macrogen had liabilities of ₩59.3b falling due within a year, and liabilities of ₩30.6b due beyond that. Offsetting these obligations, it had cash of ₩82.3b as well as receivables valued at ₩30.1b due within 12 months. So it can boast ₩22.6b more liquid assets than total liabilities.

This short term liquidity is a sign that Macrogen could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Macrogen has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Macrogen 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 Macrogen wasn't profitable at an EBIT level, but managed to grow its revenue by 7.7%, to ₩130b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Macrogen?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Macrogen lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through ₩24b of cash and made a loss of ₩21b. Given it only has net cash of ₩46.4b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Case in point: We've spotted 2 warning signs for Macrogen you should be aware of, and 1 of them is a bit concerning.

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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