Is CrystalGenomics (KOSDAQ:083790) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies CrystalGenomics, Inc. (KOSDAQ:083790) makes use of debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for CrystalGenomics

What Is CrystalGenomics's Debt?

The image below, which you can click on for greater detail, shows that CrystalGenomics had debt of ₩72.9b at the end of September 2020, a reduction from ₩82.4b over a year. But on the other hand it also has ₩114.0b in cash, leading to a ₩41.1b net cash position.

How Healthy Is CrystalGenomics' Balance Sheet?

We can see from the most recent balance sheet that CrystalGenomics had liabilities of ₩96.0b falling due within a year, and liabilities of ₩20.9b due beyond that. Offsetting this, it had ₩114.0b in cash and ₩8.73b in receivables that were due within 12 months. So it actually has ₩5.76b more liquid assets than total liabilities.

This state of affairs indicates that CrystalGenomics' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₩708.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, CrystalGenomics boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since CrystalGenomics 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.

In the last year CrystalGenomics wasn't profitable at an EBIT level, but managed to grow its revenue by 1,240%, to ₩125b. That's virtually the hole-in-one of revenue growth!

So How Risky Is CrystalGenomics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that CrystalGenomics had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of ₩33b and booked a ₩26b accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of ₩41.1b. That means it could keep spending at its current rate for more than two years. Importantly, CrystalGenomics's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with CrystalGenomics (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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