PharmAbcine (KOSDAQ:208340) Has Debt But No Earnings; Should You Worry?

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. We can see that PharmAbcine, Inc. (KOSDAQ:208340) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for PharmAbcine

What Is PharmAbcine's Net Debt?

The chart below, which you can click on for greater detail, shows that PharmAbcine had ₩56.5b in debt in December 2020; about the same as the year before. But it also has ₩97.8b in cash to offset that, meaning it has ₩41.3b net cash.

How Healthy Is PharmAbcine's Balance Sheet?

The latest balance sheet data shows that PharmAbcine had liabilities of ₩85.1b due within a year, and liabilities of ₩2.73b falling due after that. Offsetting these obligations, it had cash of ₩97.8b as well as receivables valued at ₩1.54b due within 12 months. So it can boast ₩11.5b 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. When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year PharmAbcine managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.

So How Risky Is PharmAbcine?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months PharmAbcine lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of ₩25b and booked a ₩31b accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of ₩41.3b. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that PharmAbcine is showing 2 warning signs in our investment analysis , and 1 of those can't be ignored...

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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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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