Corestem (KOSDAQ:166480) Has Debt But No Earnings; Should You Worry?

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. As with many other companies Corestem, Inc. (KOSDAQ:166480) makes use of debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Corestem

What Is Corestem's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Corestem had ₩17.1b of debt, an increase on none, over one year. However, it does have ₩73.0b in cash offsetting this, leading to net cash of ₩55.8b.

How Healthy Is Corestem's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Corestem had liabilities of ₩10.8b due within 12 months and liabilities of ₩45.0b due beyond that. Offsetting these obligations, it had cash of ₩73.0b as well as receivables valued at ₩7.48b due within 12 months. So it can boast ₩24.7b more liquid assets than total liabilities.

This short term liquidity is a sign that Corestem could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Corestem boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Corestem'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.

In the last year Corestem wasn't profitable at an EBIT level, but managed to grow its revenue by 6.9%, to ₩25b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Corestem?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Corestem had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through ₩546m of cash and made a loss of ₩8.2b. While this does make the company a bit risky, it's important to remember it has net cash of ₩55.8b. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Corestem (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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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