Is Bioneer (KOSDAQ:064550) A Risky Investment?

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.' 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. Importantly, Bioneer Corporation (KOSDAQ:064550) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at 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?

Zooming in on the latest balance sheet data, we can see that Bioneer had liabilities of ₩98.4b due within 12 months and liabilities of ₩12.1b due beyond that. Offsetting these obligations, it had cash of ₩69.7b as well as receivables valued at ₩10.7b due within 12 months. So it has liabilities totalling ₩30.1b more than its cash and near-term receivables, combined.

Of course, Bioneer has a market capitalization of ₩433.5b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

Although Bioneer made a loss at the EBIT level, last year, it was also good to see that it generated ₩71b in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Bioneer'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Bioneer may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent year, Bioneer recorded free cash flow worth 65% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

We could understand if investors are concerned about Bioneer's liabilities, but we can be reassured by the fact it has has net cash of ₩47.5b. So is Bioneer's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 2 warning signs for Bioneer that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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.
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