Is CMG Pharmaceutical (KOSDAQ:058820) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that CMG Pharmaceutical Co., Ltd. (KOSDAQ:058820) does use debt in its business. But the real question is whether this debt is making the company risky.

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Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 examine debt levels, we first consider both cash and debt levels, together.

What Is CMG Pharmaceutical's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 CMG Pharmaceutical had ₩76.1b of debt, an increase on ₩25.2b, over one year. However, its balance sheet shows it holds ₩82.8b in cash, so it actually has ₩6.72b net cash.

How Healthy Is CMG Pharmaceutical's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CMG Pharmaceutical had liabilities of ₩83.3b due within 12 months and liabilities of ₩25.4b due beyond that. On the other hand, it had cash of ₩82.8b and ₩27.6b worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to CMG Pharmaceutical's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₩277.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, CMG Pharmaceutical boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is CMG 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.

See our latest analysis for CMG Pharmaceutical

In the last year CMG Pharmaceutical's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

So How Risky Is CMG Pharmaceutical?

Although CMG Pharmaceutical had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of ₩2.9b. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that CMG Pharmaceutical is showing 1 warning sign in our investment analysis , you should know about...

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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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.