Is CHA Vaccine Research Institute (KOSDAQ:261780) Using Debt In A Risky Way?

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.' 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. We can see that CHA Vaccine Research Institute (KOSDAQ:261780) does use debt in its business. 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. 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 CHA Vaccine Research Institute

What Is CHA Vaccine Research Institute's Net Debt?

As you can see below, CHA Vaccine Research Institute had ₩9.09b of debt at September 2024, down from ₩25.3b a year prior. However, it does have ₩38.0b in cash offsetting this, leading to net cash of ₩28.9b.

How Strong Is CHA Vaccine Research Institute's Balance Sheet?

The latest balance sheet data shows that CHA Vaccine Research Institute had liabilities of ₩807.1m due within a year, and liabilities of ₩17.5b falling due after that. On the other hand, it had cash of ₩38.0b and ₩1.02b worth of receivables due within a year. So it can boast ₩20.7b more liquid assets than total liabilities.

It's good to see that CHA Vaccine Research Institute has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that CHA Vaccine Research Institute 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 you can't view debt in total isolation; since CHA Vaccine Research Institute 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 CHA Vaccine Research Institute wasn't profitable at an EBIT level, but managed to grow its revenue by 26%, to ₩371m. With any luck the company will be able to grow its way to profitability.

So How Risky Is CHA Vaccine Research Institute?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year CHA Vaccine Research Institute had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of ₩6.4b and booked a ₩4.3b accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of ₩28.9b. That means it could keep spending at its current rate for more than two years. CHA Vaccine Research Institute's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. To that end, you should learn about the 2 warning signs we've spotted with CHA Vaccine Research Institute (including 1 which is potentially serious) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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