Health Check: How Prudently Does Optipharm.CO.LTD (KOSDAQ:153710) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Optipharm.CO.,LTD (KOSDAQ:153710) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Optipharm.CO.LTD

How Much Debt Does Optipharm.CO.LTD Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Optipharm.CO.LTD had debt of ₩4.29b, up from ₩3.35b in one year. But on the other hand it also has ₩22.2b in cash, leading to a ₩17.9b net cash position.

How Healthy Is Optipharm.CO.LTD's Balance Sheet?

The latest balance sheet data shows that Optipharm.CO.LTD had liabilities of ₩5.52b due within a year, and liabilities of ₩2.02b falling due after that. Offsetting these obligations, it had cash of ₩22.2b as well as receivables valued at ₩1.23b due within 12 months. So it can boast ₩15.9b more liquid assets than total liabilities.

This surplus suggests that Optipharm.CO.LTD has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Optipharm.CO.LTD boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Optipharm.CO.LTD can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Optipharm.CO.LTD had a loss before interest and tax, and actually shrunk its revenue by 4.4%, to ₩13b. That's not what we would hope to see.

So How Risky Is Optipharm.CO.LTD?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Optipharm.CO.LTD lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of ₩2.6b and booked a ₩2.4b accounting loss. But the saving grace is the ₩17.9b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For example Optipharm.CO.LTD has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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. 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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