Bioneer (KOSDAQ:064550) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, '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 note that Bioneer Corporation (KOSDAQ:064550) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Bioneer

How Much Debt Does Bioneer Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Bioneer had ₩22.1b of debt, an increase on ₩17.7b, over one year. But it also has ₩69.7b in cash to offset that, meaning it has ₩47.5b net cash.

How Healthy Is Bioneer's Balance Sheet?

According to the last reported balance sheet, Bioneer had liabilities of ₩98.4b due within 12 months, and liabilities of ₩12.1b due beyond 12 months. Offsetting this, it had ₩69.7b in cash and ₩10.7b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩30.1b.

Since publicly traded Bioneer shares are worth a total of ₩417.2b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Bioneer also has more cash than debt, so we're pretty confident it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Bioneer turned things around in the last 12 months, delivering and EBIT of ₩71b. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Bioneer can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Bioneer has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last year, Bioneer produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Bioneer has ₩47.5b in net cash. So we don't think Bioneer's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Bioneer that you should be aware of.

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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