ISU Abxis (KOSDAQ:086890) Takes On Some Risk With Its Use Of 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.' 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 can see that ISU Abxis Co., Ltd. (KOSDAQ:086890) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for ISU Abxis

What Is ISU Abxis's Net Debt?

As you can see below, ISU Abxis had ₩30.8b of debt at March 2024, down from ₩32.6b a year prior. However, it does have ₩42.3b in cash offsetting this, leading to net cash of ₩11.5b.

How Healthy Is ISU Abxis' Balance Sheet?

We can see from the most recent balance sheet that ISU Abxis had liabilities of ₩72.1b falling due within a year, and liabilities of ₩5.44b due beyond that. On the other hand, it had cash of ₩42.3b and ₩25.0b worth of receivables due within a year. So its liabilities total ₩10.2b more than the combination of its cash and short-term receivables.

Since publicly traded ISU Abxis shares are worth a total of ₩251.6b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, ISU Abxis also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, ISU Abxis made a loss at the EBIT level, last year, but improved that to positive EBIT of ₩9.7b in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine ISU Abxis's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While ISU Abxis 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 year, ISU Abxis saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that ISU Abxis has ₩11.5b in net cash. So although we see some areas for improvement, we're not too worried about ISU Abxis's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with ISU Abxis , 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. 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.