Health Check: How Prudently Does PharmAbcine (KOSDAQ:208340) Use Debt?

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. We note that PharmAbcine, Inc. (KOSDAQ:208340) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for PharmAbcine

How Much Debt Does PharmAbcine Carry?

The image below, which you can click on for greater detail, shows that at September 2020 PharmAbcine had debt of ₩86.7b, up from ₩52.7b in one year. However, it does have ₩123.4b in cash offsetting this, leading to net cash of ₩36.7b.

A Look At PharmAbcine's Liabilities

According to the last reported balance sheet, PharmAbcine had liabilities of ₩88.5b due within 12 months, and liabilities of ₩8.24b due beyond 12 months. Offsetting this, it had ₩123.4b in cash and ₩434.0m in receivables that were due within 12 months. So it can boast ₩27.1b more liquid assets than total liabilities.

This short term liquidity is a sign that PharmAbcine could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that PharmAbcine has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is PharmAbcine'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.

While it hasn't made a profit, at least PharmAbcine booked its first revenue as a publicly listed company, in the last twelve months.

So How Risky Is PharmAbcine?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that PharmAbcine had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through ₩18b of cash and made a loss of ₩23b. But the saving grace is the ₩36.7b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For example, we've discovered 3 warning signs for PharmAbcine (1 is a bit concerning!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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