Is Cytogen (KOSDAQ:217330) Weighed On By Its Debt Load?

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 Cytogen, Inc. (KOSDAQ:217330) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at 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 December 2020 Cytogen had ₩5.38b of debt, an increase on none, over one year. However, its balance sheet shows it holds ₩16.3b in cash, so it actually has ₩11.0b net cash.

A Look At Cytogen's Liabilities

The latest balance sheet data shows that Cytogen had liabilities of ₩1.17b due within a year, and liabilities of ₩8.80b falling due after that. On the other hand, it had cash of ₩16.3b and ₩936.7m worth of receivables due within a year. So it actually has ₩7.31b more liquid assets than total liabilities.

This surplus suggests that Cytogen has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Cytogen boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Over 12 months, Cytogen made a loss at the EBIT level, and saw its revenue drop to ₩643m, which is a fall of 19%. That's not what we would hope to see.

So How Risky Is Cytogen?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Cytogen had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through ₩4.9b of cash and made a loss of ₩4.9b. While this does make the company a bit risky, it's important to remember it has net cash of ₩11.0b. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Cytogen (at least 2 which are significant) , and understanding them should be part of your investment process.

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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