Here's Why Choong Ang Vaccine Laboratory (KOSDAQ:072020) Can Manage Its Debt Responsibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Choong Ang Vaccine Laboratory Co., Ltd. (KOSDAQ:072020) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Choong Ang Vaccine Laboratory

What Is Choong Ang Vaccine Laboratory's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Choong Ang Vaccine Laboratory had debt of ₩10.1b, up from ₩4.05b in one year. But on the other hand it also has ₩28.0b in cash, leading to a ₩18.0b net cash position.

How Healthy Is Choong Ang Vaccine Laboratory's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Choong Ang Vaccine Laboratory had liabilities of ₩11.5b due within 12 months and liabilities of ₩5.92b due beyond that. Offsetting this, it had ₩28.0b in cash and ₩2.97b in receivables that were due within 12 months. So it can boast ₩13.6b more liquid assets than total liabilities.

This short term liquidity is a sign that Choong Ang Vaccine Laboratory could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Choong Ang Vaccine Laboratory has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Choong Ang Vaccine Laboratory grew its EBIT by 104% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is Choong Ang Vaccine Laboratory's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Choong Ang Vaccine Laboratory 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. Over the last three years, Choong Ang Vaccine Laboratory recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

While it is always sensible to investigate a company's debt, in this case Choong Ang Vaccine Laboratory has ₩18.0b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 104% over the last year. So we don't think Choong Ang Vaccine Laboratory's use of debt 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. For instance, we've identified 1 warning sign for Choong Ang Vaccine Laboratory 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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