Is Korea Arlico PharmLtd (KOSDAQ:260660) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Korea Arlico Pharm Co.,Ltd. (KOSDAQ:260660) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 Korea Arlico PharmLtd

How Much Debt Does Korea Arlico PharmLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Korea Arlico PharmLtd had ₩9.63b of debt in December 2020, down from ₩24.6b, one year before. However, its balance sheet shows it holds ₩19.5b in cash, so it actually has ₩9.89b net cash.

A Look At Korea Arlico PharmLtd's Liabilities

According to the last reported balance sheet, Korea Arlico PharmLtd had liabilities of ₩27.0b due within 12 months, and liabilities of ₩5.74b due beyond 12 months. Offsetting these obligations, it had cash of ₩19.5b as well as receivables valued at ₩19.4b due within 12 months. So it actually has ₩6.15b more liquid assets than total liabilities.

This short term liquidity is a sign that Korea Arlico PharmLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Korea Arlico PharmLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Korea Arlico PharmLtd's EBIT dived 16%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But it is Korea Arlico PharmLtd'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, Korea Arlico PharmLtd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Korea Arlico PharmLtd has net cash of ₩9.89b, as well as more liquid assets than liabilities. So we are not troubled with Korea Arlico PharmLtd's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Korea Arlico PharmLtd is showing 1 warning sign in our investment analysis , you should know about...

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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