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.' 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. Importantly, CORESTEM Inc. (KOSDAQ:166480) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.
What Is CORESTEM's Net Debt?
As you can see below, at the end of December 2020, CORESTEM had ₩19.6b of debt, up from none a year ago. Click the image for more detail. But it also has ₩93.5b in cash to offset that, meaning it has ₩73.9b net cash.
A Look At CORESTEM's Liabilities
According to the last reported balance sheet, CORESTEM had liabilities of ₩68.7b due within 12 months, and liabilities of ₩6.62b due beyond 12 months. On the other hand, it had cash of ₩93.5b and ₩7.17b worth of receivables due within a year. So it actually has ₩25.3b more liquid assets than total liabilities.
This surplus suggests that CORESTEM has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that CORESTEM has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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 8.5%, to ₩26b. 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?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that CORESTEM had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of ₩553m and booked a ₩23b accounting loss. But the saving grace is the ₩73.9b 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for CORESTEM you should be aware of, and 1 of them is concerning.
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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