Health Check: How Prudently Does EyeGene (KOSDAQ:185490) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies EyeGene Inc. (KOSDAQ:185490) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for EyeGene

What Is EyeGene's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 EyeGene had ₩2.67b of debt, an increase on ₩1.45b, over one year. However, it does have ₩45.7b in cash offsetting this, leading to net cash of ₩43.0b.

How Strong Is EyeGene's Balance Sheet?

We can see from the most recent balance sheet that EyeGene had liabilities of ₩5.52b falling due within a year, and liabilities of ₩6.90b due beyond that. Offsetting this, it had ₩45.7b in cash and ₩476.3m in receivables that were due within 12 months. So it actually has ₩33.8b more liquid assets than total liabilities.

This surplus strongly suggests that EyeGene has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that EyeGene has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since EyeGene 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.

In the last year EyeGene had a loss before interest and tax, and actually shrunk its revenue by 43%, to ₩2.9b. To be frank that doesn't bode well.

So How Risky Is EyeGene?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that EyeGene had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through ₩22b of cash and made a loss of ₩17b. But at least it has ₩43.0b on the balance sheet to spend on growth, near-term. 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. Be aware that EyeGene is showing 4 warning signs in our investment analysis , and 1 of those is a bit concerning...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com