Is Genebiotech (KOSDAQ:086060) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Genebiotech Co., Ltd. (KOSDAQ:086060) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Genebiotech

How Much Debt Does Genebiotech Carry?

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.

How Healthy Is Genebiotech's Balance Sheet?

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. Succinctly put, Genebiotech boasts net cash, so it's fair to say it does not have a heavy debt load!

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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Genebiotech 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, a company can only pay off debt with cold hard cash, not accounting profits. 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 investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Genebiotech has ₩3.47b in net cash and a decent-looking balance sheet. So while Genebiotech does not have a great balance sheet, it's certainly not too bad. 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. For instance, we've identified 3 warning signs for Genebiotech (2 are concerning) you should be aware of.

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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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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