Is Biotoxtech (KOSDAQ:086040) Using Too Much Debt?

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.' 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 Biotoxtech Co., Ltd. (KOSDAQ:086040) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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. 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

How Much Debt Does Biotoxtech Carry?

The chart below, which you can click on for greater detail, shows that Biotoxtech had ₩17.5b in debt in September 2020; about the same as the year before. But on the other hand it also has ₩19.5b in cash, leading to a ₩2.08b net cash position.

How Strong Is Biotoxtech's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Biotoxtech had liabilities of ₩20.6b due within 12 months and liabilities of ₩7.56b due beyond that. Offsetting this, it had ₩19.5b in cash and ₩5.24b in receivables that were due within 12 months. So its liabilities total ₩3.41b more than the combination of its cash and short-term receivables.

Having regard to Biotoxtech's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₩292.6b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Biotoxtech also has more cash than debt, so we're pretty confident it can manage its debt safely.

We also note that Biotoxtech improved its EBIT from a last year's loss to a positive ₩729m. When analysing debt levels, the balance sheet is the obvious place to start. But it is Biotoxtech'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Biotoxtech 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. During the last year, Biotoxtech produced sturdy free cash flow equating to 63% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Biotoxtech has ₩2.08b in net cash. So we don't have any problem with Biotoxtech's use of debt. 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. Be aware that Biotoxtech is showing 3 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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