Is Cytogen (KOSDAQ:217330) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Cytogen, Inc. (KOSDAQ:217330) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Cytogen

How Much Debt Does Cytogen Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Cytogen had ₩10.0b of debt, an increase on none, over one year. But on the other hand it also has ₩18.7b in cash, leading to a ₩8.68b net cash position.

How Strong Is Cytogen's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cytogen had liabilities of ₩1.27b due within 12 months and liabilities of ₩10.6b due beyond that. On the other hand, it had cash of ₩18.7b and ₩588.6m worth of receivables due within a year. So it actually has ₩7.42b more liquid assets than total liabilities.

This short term liquidity is a sign that Cytogen could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Cytogen has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Cytogen will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Cytogen had a loss before interest and tax, and actually shrunk its revenue by 58%, to ₩413m. That makes us nervous, to say the least.

So How Risky Is Cytogen?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Cytogen had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through ₩3.9b of cash and made a loss of ₩5.8b. But the saving grace is the ₩8.68b on the balance sheet. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 Cytogen (2 are concerning) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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