Optipharm.CO.LTD (KOSDAQ:153710) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Optipharm.CO.,LTD (KOSDAQ:153710) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Optipharm.CO.LTD

What Is Optipharm.CO.LTD's Debt?

You can click the graphic below for the historical numbers, but it shows that Optipharm.CO.LTD had ₩2.88b of debt in September 2020, down from ₩3.46b, one year before. But it also has ₩21.8b in cash to offset that, meaning it has ₩18.9b net cash.

A Look At Optipharm.CO.LTD's Liabilities

We can see from the most recent balance sheet that Optipharm.CO.LTD had liabilities of ₩5.43b falling due within a year, and liabilities of ₩2.44b due beyond that. On the other hand, it had cash of ₩21.8b and ₩2.81b worth of receivables due within a year. So it can boast ₩16.7b more liquid assets than total liabilities.

This short term liquidity is a sign that Optipharm.CO.LTD could probably pay off its debt with ease, as its balance sheet is far from stretched. 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.

Over 12 months, Optipharm.CO.LTD made a loss at the EBIT level, and saw its revenue drop to ₩13b, which is a fall of 7.3%. We would much prefer see growth.

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 we do note that Optipharm.CO.LTD had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through ₩1.2b of cash and made a loss of ₩2.0b. But the saving grace is the ₩18.9b on the balance sheet. That means it could keep spending at its current rate for more than two years. 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. 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. Take risks, for example - Optipharm.CO.LTD has 1 warning sign we think you should be aware of.

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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