Is GL Pharm Tech (KOSDAQ:204840) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies GL Pharm Tech Corp. (KOSDAQ:204840) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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, 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.

View our latest analysis for GL Pharm Tech

What Is GL Pharm Tech's Net Debt?

The chart below, which you can click on for greater detail, shows that GL Pharm Tech had ₩16.6b in debt in March 2024; about the same as the year before. However, it does have ₩12.1b in cash offsetting this, leading to net debt of about ₩4.49b.

A Look At GL Pharm Tech's Liabilities

According to the last reported balance sheet, GL Pharm Tech had liabilities of ₩16.8b due within 12 months, and liabilities of ₩9.53b due beyond 12 months. Offsetting this, it had ₩12.1b in cash and ₩4.08b in receivables that were due within 12 months. So its liabilities total ₩10.1b more than the combination of its cash and short-term receivables.

Of course, GL Pharm Tech has a market capitalization of ₩88.3b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is GL Pharm Tech'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.

Over 12 months, GL Pharm Tech reported revenue of ₩27b, which is a gain of 38%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, GL Pharm Tech still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₩4.2b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₩3.8b in negative free cash flow over the last twelve months. 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. Be aware that GL Pharm Tech is showing 2 warning signs in our investment analysis , you should know about...

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.

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