Is Kangstem Biotech (KOSDAQ:217730) Weighed On By Its Debt Load?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Kangstem Biotech Co., Ltd. (KOSDAQ:217730) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Kangstem Biotech

What Is Kangstem Biotech's Debt?

The image below, which you can click on for greater detail, shows that Kangstem Biotech had debt of ₩14.9b at the end of September 2020, a reduction from ₩27.4b over a year. But on the other hand it also has ₩32.2b in cash, leading to a ₩17.2b net cash position.

How Strong Is Kangstem Biotech's Balance Sheet?

The latest balance sheet data shows that Kangstem Biotech had liabilities of ₩11.3b due within a year, and liabilities of ₩21.1b falling due after that. Offsetting these obligations, it had cash of ₩32.2b as well as receivables valued at ₩1.19b due within 12 months. So it actually has ₩975.5m more liquid assets than total liabilities.

This state of affairs indicates that Kangstem Biotech's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₩178.4b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Kangstem Biotech boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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 reported revenue of ₩8.6b, which is a gain of 44%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

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 ₩21b of cash and made a loss of ₩24b. But at least it has ₩17.2b on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Kangstem Biotech may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. Case in point: We've spotted 2 warning signs for Kangstem Biotech you should be aware of, and 1 of them is concerning.

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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