Health Check: How Prudently Does ST PharmLtd (KOSDAQ:237690) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We note that ST Pharm Co.,Ltd. (KOSDAQ:237690) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for ST PharmLtd

What Is ST PharmLtd's Debt?

As you can see below, at the end of June 2020, ST PharmLtd had ₩15.1b of debt, up from ₩117.0m a year ago. Click the image for more detail. However, it does have ₩48.1b in cash offsetting this, leading to net cash of ₩33.0b.

How Strong Is ST PharmLtd's Balance Sheet?

The latest balance sheet data shows that ST PharmLtd had liabilities of ₩16.5b due within a year, and liabilities of ₩22.6b falling due after that. Offsetting these obligations, it had cash of ₩48.1b as well as receivables valued at ₩28.9b due within 12 months. So it can boast ₩38.0b more liquid assets than total liabilities.

This surplus suggests that ST PharmLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that ST PharmLtd has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if ST PharmLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, ST PharmLtd reported revenue of ₩113b, 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.

So How Risky Is ST PharmLtd?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that ST PharmLtd had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of ₩39b and booked a ₩11b accounting loss. But at least it has ₩33.0b on the balance sheet to spend on growth, near-term. ST PharmLtd's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. For riskier companies like ST PharmLtd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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