Is PanGen Biotech (KOSDAQ:222110) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, PanGen Biotech Inc. (KOSDAQ:222110) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for PanGen Biotech

How Much Debt Does PanGen Biotech Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 PanGen Biotech had ₩18.1b of debt, an increase on ₩17.1b, over one year. But it also has ₩19.9b in cash to offset that, meaning it has ₩1.74b net cash.

A Look At PanGen Biotech's Liabilities

Zooming in on the latest balance sheet data, we can see that PanGen Biotech had liabilities of ₩19.7b due within 12 months and liabilities of ₩2.00b due beyond that. Offsetting this, it had ₩19.9b in cash and ₩1.03b in receivables that were due within 12 months. So its liabilities total ₩801.6m more than the combination of its cash and short-term receivables.

This state of affairs indicates that PanGen Biotech's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₩119.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, PanGen Biotech boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since PanGen Biotech 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 PanGen Biotech wasn't profitable at an EBIT level, but managed to grow its revenue by 64%, to ₩6.0b. With any luck the company will be able to grow its way to profitability.

So How Risky Is PanGen Biotech?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year PanGen Biotech had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of ₩6.2b and booked a ₩6.9b accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of ₩1.74b. That means it could keep spending at its current rate for more than two years. PanGen Biotech's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for PanGen Biotech that you should be aware of before investing here.

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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