Health Check: How Prudently Does Green Lifescience (KOSDAQ:114450) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Green Lifescience Co., Ltd. (KOSDAQ:114450) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Green Lifescience

What Is Green Lifescience's Debt?

You can click the graphic below for the historical numbers, but it shows that Green Lifescience had ₩5.64b of debt in September 2023, down from ₩6.80b, one year before. However, it does have ₩14.7b in cash offsetting this, leading to net cash of ₩9.04b.

A Look At Green Lifescience's Liabilities

According to the last reported balance sheet, Green Lifescience had liabilities of ₩8.54b due within 12 months, and liabilities of ₩566.7m due beyond 12 months. Offsetting these obligations, it had cash of ₩14.7b as well as receivables valued at ₩4.19b due within 12 months. So it can boast ₩9.77b more liquid assets than total liabilities.

It's good to see that Green Lifescience has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Green Lifescience boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Green Lifescience'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.

Over 12 months, Green Lifescience made a loss at the EBIT level, and saw its revenue drop to ₩23b, which is a fall of 42%. That makes us nervous, to say the least.

So How Risky Is Green Lifescience?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Green Lifescience had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of ₩1.8b and booked a ₩5.2b accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of ₩9.04b. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Be aware that Green Lifescience is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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.