Is Biotoxtech (KOSDAQ:086040) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Biotoxtech Co., Ltd. (KOSDAQ:086040) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Biotoxtech

What Is Biotoxtech's Net Debt?

The chart below, which you can click on for greater detail, shows that Biotoxtech had ₩17.0b in debt in December 2020; about the same as the year before. However, its balance sheet shows it holds ₩21.2b in cash, so it actually has ₩4.19b net cash.

How Strong Is Biotoxtech's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Biotoxtech had liabilities of ₩25.7b due within 12 months and liabilities of ₩3.66b due beyond that. Offsetting this, it had ₩21.2b in cash and ₩4.95b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩3.25b.

Given Biotoxtech has a market capitalization of ₩151.1b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Biotoxtech boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Biotoxtech improved its EBIT from a last year's loss to a positive ₩537m. 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 Biotoxtech will need earnings to service that debt. 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. Biotoxtech may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Biotoxtech actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Biotoxtech has ₩4.19b in net cash. And it impressed us with free cash flow of ₩2.0b, being 376% of its EBIT. So we are not troubled with Biotoxtech's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Biotoxtech has 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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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