Is Theragen EtexLtd (KOSDAQ:066700) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Theragen Etex Co.,Ltd. (KOSDAQ:066700) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Theragen EtexLtd

How Much Debt Does Theragen EtexLtd Carry?

The image below, which you can click on for greater detail, shows that Theragen EtexLtd had debt of ₩35.5b at the end of September 2020, a reduction from ₩45.0b over a year. However, it also had ₩13.5b in cash, and so its net debt is ₩22.0b.

A Look At Theragen EtexLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Theragen EtexLtd had liabilities of ₩60.4b due within 12 months and liabilities of ₩86.4b due beyond that. Offsetting these obligations, it had cash of ₩13.5b as well as receivables valued at ₩70.2b due within 12 months. So its liabilities total ₩63.0b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Theragen EtexLtd is worth ₩269.9b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Theragen EtexLtd'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 Theragen EtexLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 3.4%, to ₩142b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Theragen EtexLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₩1.1b at the EBIT level. 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. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of ₩5.7b and the profit of ₩33b. So one might argue that there's still a chance it can get things on the right track. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Theragen EtexLtd that you should be aware of before investing here.

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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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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