Here's Why Korea Arlico PharmLtd (KOSDAQ:260660) Can Afford Some 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 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. We can see that Korea Arlico Pharm Co.,Ltd. (KOSDAQ:260660) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Korea Arlico PharmLtd

How Much Debt Does Korea Arlico PharmLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Korea Arlico PharmLtd had debt of ₩45.4b, up from ₩37.1b in one year. However, it also had ₩15.0b in cash, and so its net debt is ₩30.4b.

How Strong Is Korea Arlico PharmLtd's Balance Sheet?

According to the last reported balance sheet, Korea Arlico PharmLtd had liabilities of ₩65.3b due within 12 months, and liabilities of ₩15.3b due beyond 12 months. Offsetting this, it had ₩15.0b in cash and ₩24.8b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩40.7b.

This is a mountain of leverage relative to its market capitalization of ₩61.4b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Korea Arlico PharmLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Korea Arlico PharmLtd had a loss before interest and tax, and actually shrunk its revenue by 2.3%, to ₩183b. We would much prefer see growth.

Caveat Emptor

Importantly, Korea Arlico PharmLtd had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping ₩9.3b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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 ₩15b in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Case in point: We've spotted 2 warning signs for Korea Arlico PharmLtd you should be aware of, and 1 of them can't be ignored.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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