Is Korea Arlico PharmLtd (KOSDAQ:260660) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Korea Arlico Pharm Co.,Ltd. (KOSDAQ:260660) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Korea Arlico PharmLtd

What Is Korea Arlico PharmLtd's Debt?

As you can see below, Korea Arlico PharmLtd had ₩20.6b of debt at September 2020, down from ₩31.0b a year prior. However, it does have ₩23.5b in cash offsetting this, leading to net cash of ₩2.90b.

A Look At Korea Arlico PharmLtd's Liabilities

We can see from the most recent balance sheet that Korea Arlico PharmLtd had liabilities of ₩37.3b falling due within a year, and liabilities of ₩5.98b due beyond that. Offsetting this, it had ₩23.5b in cash and ₩19.6b in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Korea Arlico PharmLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₩131.1b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Korea Arlico PharmLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Korea Arlico PharmLtd grew its EBIT at 17% over the last year, further increasing its ability to manage debt. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Korea Arlico PharmLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Korea Arlico PharmLtd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Korea Arlico PharmLtd has ₩2.90b in net cash. And it impressed us with its EBIT growth of 17% over the last year. So we are not troubled with Korea Arlico PharmLtd's debt use. 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. Take risks, for example - Korea Arlico PharmLtd has 1 warning sign we think you should be aware of.

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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