Is Kangstem Biotech (KOSDAQ:217730) Using Debt Sensibly?

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. As with many other companies Kangstem Biotech Co., Ltd. (KOSDAQ:217730) makes use of debt. 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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Kangstem Biotech

How Much Debt Does Kangstem Biotech Carry?

As you can see below, Kangstem Biotech had ₩11.7b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have ₩31.1b in cash offsetting this, leading to net cash of ₩19.3b.

How Strong Is Kangstem Biotech's Balance Sheet?

We can see from the most recent balance sheet that Kangstem Biotech had liabilities of ₩18.4b falling due within a year, and liabilities of ₩12.3b due beyond that. Offsetting these obligations, it had cash of ₩31.1b as well as receivables valued at ₩2.69b due within 12 months. So it can boast ₩3.07b more liquid assets than total liabilities.

This short term liquidity is a sign that Kangstem Biotech could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Kangstem Biotech 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 it is Kangstem Biotech'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.

Over 12 months, Kangstem Biotech made a loss at the EBIT level, and saw its revenue drop to ₩12b, which is a fall of 25%. To be frank that doesn't bode well.

So How Risky Is Kangstem Biotech?

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 Kangstem Biotech lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through ₩18b of cash and made a loss of ₩20b. But at least it has ₩19.3b on the balance sheet to spend on growth, near-term. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Kangstem Biotech (at least 2 which don't sit too well with us) , 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.