KPX Lifescience.Co.Ltd (KOSDAQ:114450) Has Debt But No Earnings; Should You Worry?

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.' 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. As with many other companies KPX Lifescience.Co.,Ltd. (KOSDAQ:114450) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for KPX Lifescience.Co.Ltd

How Much Debt Does KPX Lifescience.Co.Ltd Carry?

As you can see below, at the end of September 2020, KPX Lifescience.Co.Ltd had ₩6.92b of debt, up from ₩5.10b a year ago. Click the image for more detail. But on the other hand it also has ₩18.0b in cash, leading to a ₩11.1b net cash position.

A Look At KPX Lifescience.Co.Ltd's Liabilities

According to the last reported balance sheet, KPX Lifescience.Co.Ltd had liabilities of ₩9.29b due within 12 months, and liabilities of ₩649.3m due beyond 12 months. On the other hand, it had cash of ₩18.0b and ₩2.99b worth of receivables due within a year. So it can boast ₩11.0b more liquid assets than total liabilities.

This surplus suggests that KPX Lifescience.Co.Ltd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, KPX Lifescience.Co.Ltd 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 you can't view debt in total isolation; since KPX Lifescience.Co.Ltd will need earnings to service that debt. 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.

In the last year KPX Lifescience.Co.Ltd had a loss before interest and tax, and actually shrunk its revenue by 18%, to ₩28b. That's not what we would hope to see.

So How Risky Is KPX Lifescience.Co.Ltd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year KPX Lifescience.Co.Ltd had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of ₩1.2b and booked a ₩8.2m accounting loss. With only ₩11.1b on the balance sheet, it would appear that its going to need to raise capital again soon. 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for KPX Lifescience.Co.Ltd you should be aware of, and 1 of them can't be ignored.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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.
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