Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that Green Cross Lab Cell Corporation (KOSDAQ:144510) does have debt on its balance sheet. But is this debt a concern to shareholders?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Green Cross Lab Cell Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 Green Cross Lab Cell had ₩3.00b of debt, an increase on none, over one year. But it also has ₩14.4b in cash to offset that, meaning it has ₩11.4b net cash.
How Healthy Is Green Cross Lab Cell's Balance Sheet?
The latest balance sheet data shows that Green Cross Lab Cell had liabilities of ₩12.4b due within a year, and liabilities of ₩10.0b falling due after that. On the other hand, it had cash of ₩14.4b and ₩10.4b worth of receivables due within a year. So it can boast ₩2.44b more liquid assets than total liabilities.
This state of affairs indicates that Green Cross Lab Cell's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₩995.2b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Green Cross Lab Cell boasts net cash, so it's fair to say it does not have a heavy debt load!
Although Green Cross Lab Cell made a loss at the EBIT level, last year, it was also good to see that it generated ₩3.8b in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Green Cross Lab Cell'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Green Cross Lab Cell 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. During the last year, Green Cross Lab Cell burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
While it is always sensible to investigate a company's debt, in this case Green Cross Lab Cell has ₩11.4b in net cash and a decent-looking balance sheet. So we don't have any problem with Green Cross Lab Cell's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Green Cross Lab Cell , 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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GC Cell Corporation develops cell therapy products.
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Excellent balance sheet with solid track record.
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