Korea Arlico PharmLtd (KOSDAQ:260660) Is Carrying A Fair Bit 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. We note that Korea Arlico Pharm Co.,Ltd. (KOSDAQ:260660) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Korea Arlico PharmLtd

What Is Korea Arlico PharmLtd's Net Debt?

As you can see below, at the end of June 2024, Korea Arlico PharmLtd had ₩47.0b of debt, up from ₩36.5b a year ago. Click the image for more detail. On the flip side, it has ₩17.7b in cash leading to net debt of about ₩29.4b.

How Strong Is Korea Arlico PharmLtd's Balance Sheet?

The latest balance sheet data shows that Korea Arlico PharmLtd had liabilities of ₩69.2b due within a year, and liabilities of ₩14.4b falling due after that. Offsetting these obligations, it had cash of ₩17.7b as well as receivables valued at ₩24.2b due within 12 months. So its liabilities total ₩41.8b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₩52.2b, so it does suggest shareholders should keep an eye on Korea Arlico PharmLtd's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Korea Arlico PharmLtd made a loss at the EBIT level, and saw its revenue drop to ₩179b, which is a fall of 2.9%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Korea Arlico PharmLtd produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping ₩11b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩20b of cash over the last year. So suffice it to say we consider the stock very risky. 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. Case in point: We've spotted 2 warning signs for Korea Arlico PharmLtd you should be aware of, and 1 of them makes us a bit uncomfortable.

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.