Union Korea Pharm (KOSDAQ:080720) Is Carrying A Fair Bit Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Union Korea Pharm Co., Ltd. (KOSDAQ:080720) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Union Korea Pharm

How Much Debt Does Union Korea Pharm Carry?

The image below, which you can click on for greater detail, shows that Union Korea Pharm had debt of ₩12.7b at the end of September 2020, a reduction from ₩23.7b over a year. However, because it has a cash reserve of ₩6.30b, its net debt is less, at about ₩6.43b.

How Healthy Is Union Korea Pharm's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Union Korea Pharm had liabilities of ₩19.3b due within 12 months and liabilities of ₩5.86b due beyond that. Offsetting these obligations, it had cash of ₩6.30b as well as receivables valued at ₩26.7b due within 12 months. So it can boast ₩7.78b more liquid assets than total liabilities.

This surplus suggests that Union Korea Pharm has a conservative balance sheet, and could probably eliminate its debt without much difficulty. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Union Korea Pharm will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Union Korea Pharm saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Union Korea Pharm produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ₩6.4b. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. 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 instance, we've identified 2 warning signs for Union Korea Pharm that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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