Is Pharma Research Products (KOSDAQ:214450) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Pharma Research Products Co., Ltd (KOSDAQ:214450) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Pharma Research Products

What Is Pharma Research Products's Net Debt?

As you can see below, at the end of September 2020, Pharma Research Products had ₩33.4b of debt, up from ₩19.4b a year ago. Click the image for more detail. However, it does have ₩68.2b in cash offsetting this, leading to net cash of ₩34.9b.

How Strong Is Pharma Research Products' Balance Sheet?

The latest balance sheet data shows that Pharma Research Products had liabilities of ₩38.3b due within a year, and liabilities of ₩22.0b falling due after that. Offsetting these obligations, it had cash of ₩68.2b as well as receivables valued at ₩26.9b due within 12 months. So it can boast ₩34.9b more liquid assets than total liabilities.

This surplus suggests that Pharma Research Products has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Pharma Research Products has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Pharma Research Products grew its EBIT by 108% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Pharma Research Products can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Pharma Research Products has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Pharma Research Products burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Pharma Research Products has net cash of ₩34.9b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 108% over the last year. So we don't have any problem with Pharma Research Products's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Pharma Research Products, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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