Is LabGenomics (KOSDAQ:084650) Weighed On By Its Debt Load?

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 note that LabGenomics Co., Ltd. (KOSDAQ:084650) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 LabGenomics

What Is LabGenomics's Debt?

As you can see below, LabGenomics had ₩42.9b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has ₩106.0b in cash to offset that, meaning it has ₩63.0b net cash.

How Strong Is LabGenomics' Balance Sheet?

The latest balance sheet data shows that LabGenomics had liabilities of ₩76.1b due within a year, and liabilities of ₩2.64b falling due after that. Offsetting this, it had ₩106.0b in cash and ₩38.6b in receivables that were due within 12 months. So it actually has ₩65.8b more liquid assets than total liabilities.

This surplus suggests that LabGenomics is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that LabGenomics has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine LabGenomics's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, LabGenomics reported revenue of ₩85b, which is a gain of 17%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is LabGenomics?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months LabGenomics lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through ₩14b of cash and made a loss of ₩21b. Given it only has net cash of ₩63.0b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. We've identified 2 warning signs with LabGenomics , and understanding them should be part of your investment process.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.