Here's Why ADBiotech (KOSDAQ:179530) Can Afford Some Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that ADBiotech Co., Ltd. (KOSDAQ:179530) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for ADBiotech

How Much Debt Does ADBiotech Carry?

As you can see below, ADBiotech had ₩10.8b of debt at September 2024, down from ₩12.9b a year prior. On the flip side, it has ₩1.87b in cash leading to net debt of about ₩8.92b.

A Look At ADBiotech's Liabilities

According to the last reported balance sheet, ADBiotech had liabilities of ₩13.6b due within 12 months, and liabilities of ₩4.71b due beyond 12 months. On the other hand, it had cash of ₩1.87b and ₩1.17b worth of receivables due within a year. So it has liabilities totalling ₩15.3b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₩24.7b, so it does suggest shareholders should keep an eye on ADBiotech's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since ADBiotech will need earnings to service that debt. 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.

Over 12 months, ADBiotech made a loss at the EBIT level, and saw its revenue drop to ₩8.8b, which is a fall of 16%. We would much prefer see growth.

Caveat Emptor

While ADBiotech's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable ₩4.5b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩171m of cash over the last year. So to be blunt we think it is risky. 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. Case in point: We've spotted 4 warning signs for ADBiotech you should be aware of, and 2 of them are significant.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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