ISU Abxis (KOSDAQ:086890) Takes On Some Risk With Its Use Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that ISU Abxis Co., Ltd. (KOSDAQ:086890) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 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. 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?

The image below, which you can click on for greater detail, shows that ISU Abxis had debt of ₩27.0b at the end of June 2024, a reduction from ₩34.9b over a year. But it also has ₩31.3b in cash to offset that, meaning it has ₩4.35b net cash.

A Look At ISU Abxis' Liabilities

The latest balance sheet data shows that ISU Abxis had liabilities of ₩64.5b due within a year, and liabilities of ₩5.70b falling due after that. Offsetting these obligations, it had cash of ₩31.3b as well as receivables valued at ₩27.2b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩11.6b.

Since publicly traded ISU Abxis shares are worth a total of ₩191.4b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, ISU Abxis boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, ISU Abxis made a loss at the EBIT level, last year, but improved that to positive EBIT of ₩14b in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if ISU Abxis can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. ISU Abxis may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last year, ISU Abxis 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

We could understand if investors are concerned about ISU Abxis's liabilities, but we can be reassured by the fact it has has net cash of ₩4.35b. So while ISU Abxis does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with ISU Abxis , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.