Here's Why Genebiotech (KOSDAQ:086060) Has A Meaningful Debt Burden

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Genebiotech Co., Ltd. (KOSDAQ:086060) does carry debt. 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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Genebiotech

What Is Genebiotech's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Genebiotech had debt of ₩21.5b, up from ₩19.4b in one year. But it also has ₩25.0b in cash to offset that, meaning it has ₩3.47b net cash.

A Look At Genebiotech's Liabilities

Zooming in on the latest balance sheet data, we can see that Genebiotech had liabilities of ₩13.8b due within 12 months and liabilities of ₩15.7b due beyond that. Offsetting this, it had ₩25.0b in cash and ₩9.92b in receivables that were due within 12 months. So it can boast ₩5.41b more liquid assets than total liabilities.

This surplus suggests that Genebiotech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Genebiotech has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Genebiotech's saving grace is its low debt levels, because its EBIT has tanked 46% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Genebiotech 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Genebiotech 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 three years, Genebiotech burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Genebiotech has net cash of ₩3.47b, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Genebiotech's balance sheet. 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. We've identified 3 warning signs with Genebiotech (at least 2 which make us uncomfortable) , and understanding them should be part of your investment process.

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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