Would GL Pharm Tech (KOSDAQ:204840) Be Better Off With Less 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.' 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. We can see that GL Pharm Tech Corp. (KOSDAQ:204840) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for GL Pharm Tech

What Is GL Pharm Tech's Debt?

As you can see below, GL Pharm Tech had ₩12.8b of debt at December 2020, down from ₩15.6b a year prior. However, it does have ₩9.49b in cash offsetting this, leading to net debt of about ₩3.34b.

A Look At GL Pharm Tech's Liabilities

We can see from the most recent balance sheet that GL Pharm Tech had liabilities of ₩7.66b falling due within a year, and liabilities of ₩13.0b due beyond that. Offsetting these obligations, it had cash of ₩9.49b as well as receivables valued at ₩3.64b due within 12 months. So its liabilities total ₩7.50b more than the combination of its cash and short-term receivables.

Given GL Pharm Tech has a market capitalization of ₩58.5b, 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. 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 ₩12b, which is a gain of 13%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, GL Pharm Tech had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₩2.6b. 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. Another cause for caution is that is bled ₩3.8b in negative free cash flow over the last twelve months. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for GL Pharm Tech that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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