Is CTCBIO (KOSDAQ:060590) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies CTCBIO Inc. (KOSDAQ:060590) makes use of 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for CTCBIO

What Is CTCBIO's Net Debt?

As you can see below, CTCBIO had ₩71.3b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has ₩19.9b in cash leading to net debt of about ₩51.3b.

A Look At CTCBIO's Liabilities

The latest balance sheet data shows that CTCBIO had liabilities of ₩76.5b due within a year, and liabilities of ₩37.8b falling due after that. On the other hand, it had cash of ₩19.9b and ₩34.1b worth of receivables due within a year. So it has liabilities totalling ₩60.3b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since CTCBIO has a market capitalization of ₩148.3b, 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 CTCBIO'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 CTCBIO's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months CTCBIO produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ₩5.2b. 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 ₩6.6b in negative free cash flow over the last twelve months. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - CTCBIO has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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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