We Think OliX Pharmaceuticals (KOSDAQ:226950) Has A Fair Chunk Of Debt

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.' 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, OliX Pharmaceuticals, Inc (KOSDAQ:226950) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

Check out our latest analysis for OliX Pharmaceuticals

What Is OliX Pharmaceuticals's Net Debt?

You can click the graphic below for the historical numbers, but it shows that OliX Pharmaceuticals had ₩42.9b of debt in March 2024, down from ₩50.8b, one year before. On the flip side, it has ₩32.7b in cash leading to net debt of about ₩10.3b.

How Strong Is OliX Pharmaceuticals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that OliX Pharmaceuticals had liabilities of ₩7.09b due within 12 months and liabilities of ₩57.8b due beyond that. On the other hand, it had cash of ₩32.7b and ₩1.47b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩30.8b.

Since publicly traded OliX Pharmaceuticals shares are worth a total of ₩221.6b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is OliX Pharmaceuticals's earnings that will influence how the balance sheet holds up in the future. 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, OliX Pharmaceuticals reported revenue of ₩16b, which is a gain of 68%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, OliX Pharmaceuticals still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₩20b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₩29b in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for OliX Pharmaceuticals (1 is potentially serious!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com