We Think Kolon Life Science (KOSDAQ:102940) Has A Fair Chunk Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Kolon Life Science Inc. (KOSDAQ:102940) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 Kolon Life Science

How Much Debt Does Kolon Life Science Carry?

As you can see below, at the end of September 2020, Kolon Life Science had ₩82.2b of debt, up from ₩74.5b a year ago. Click the image for more detail. However, it also had ₩14.1b in cash, and so its net debt is ₩68.1b.

A Look At Kolon Life Science's Liabilities

According to the last reported balance sheet, Kolon Life Science had liabilities of ₩103.4b due within 12 months, and liabilities of ₩46.1b due beyond 12 months. Offsetting this, it had ₩14.1b in cash and ₩25.6b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩109.8b.

While this might seem like a lot, it is not so bad since Kolon Life Science has a market capitalization of ₩211.6b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Kolon Life Science's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Kolon Life Science wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to ₩159b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Kolon Life Science produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₩9.6b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₩46b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Kolon Life Science (of which 2 shouldn't be ignored!) you should know about.

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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