Is GeneBioTech Ltd (KOSDAQ:086060) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that GeneBioTech Co. ,Ltd (KOSDAQ:086060) does have debt on its balance sheet. But is this debt a concern to shareholders?

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When Is Debt A Problem?

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. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is GeneBioTech Ltd's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 GeneBioTech Ltd had debt of ₩15.7b, up from ₩12.2b in one year. But on the other hand it also has ₩23.4b in cash, leading to a ₩7.73b net cash position.

How Strong Is GeneBioTech Ltd's Balance Sheet?

We can see from the most recent balance sheet that GeneBioTech Ltd had liabilities of ₩18.4b falling due within a year, and liabilities of ₩2.65b due beyond that. Offsetting this, it had ₩23.4b in cash and ₩14.1b in receivables that were due within 12 months. So it actually has ₩16.4b more liquid assets than total liabilities.

This surplus strongly suggests that GeneBioTech Ltd has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, GeneBioTech Ltd boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for GeneBioTech Ltd

But the other side of the story is that GeneBioTech Ltd saw its EBIT decline by 3.3% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But it is GeneBioTech Ltd'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While GeneBioTech Ltd 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. Over the last three years, GeneBioTech Ltd barely recorded positive free cash flow, in total. While many companies do operate at break-even, we prefer see substantial free cash flow, especially if a it already has dead.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that GeneBioTech Ltd has net cash of ₩7.73b, as well as more liquid assets than liabilities. So we are not troubled with GeneBioTech Ltd's debt use. 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. To that end, you should be aware of the 1 warning sign we've spotted with GeneBioTech Ltd .

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.