Would Prostemics (KOSDAQ:203690) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Prostemics Co., Ltd. (KOSDAQ:203690) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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, 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 Prostemics

What Is Prostemics's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Prostemics had ₩31.7b of debt, an increase on none, over one year. However, it does have ₩16.4b in cash offsetting this, leading to net debt of about ₩15.3b.

How Strong Is Prostemics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Prostemics had liabilities of ₩33.7b due within 12 months and liabilities of ₩4.98b due beyond that. Offsetting these obligations, it had cash of ₩16.4b as well as receivables valued at ₩7.58b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩14.8b.

Given Prostemics has a market capitalization of ₩146.9b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is Prostemics's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Prostemics wasn't profitable at an EBIT level, but managed to grow its revenue by 190%, to ₩21b. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

Despite the top line growth, Prostemics still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₩1.2b. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₩7.7b of cash over the last year. So in short it's a really risky stock. 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. We've identified 2 warning signs with Prostemics (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

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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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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