Is CHA Vaccine Research Institute (KOSDAQ:261780) Using Debt Sensibly?

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 can see that CHA Vaccine Research Institute (KOSDAQ:261780) does use debt in its business. But the real question is whether this debt is making the company risky.

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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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is CHA Vaccine Research Institute's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 CHA Vaccine Research Institute had ₩9.58b of debt, an increase on ₩3.98b, over one year. But it also has ₩40.1b in cash to offset that, meaning it has ₩30.5b net cash.

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

The latest balance sheet data shows that CHA Vaccine Research Institute had liabilities of ₩9.61b due within a year, and liabilities of ₩9.91b falling due after that. Offsetting this, it had ₩40.1b in cash and ₩399.9m in receivables that were due within 12 months. So it actually has ₩21.0b more liquid assets than total liabilities.

This excess liquidity suggests that CHA Vaccine Research Institute is taking a careful approach to debt. 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. There's no doubt that we learn most about debt from the balance sheet. But it is CHA Vaccine Research Institute'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.

Check out our latest analysis for CHA Vaccine Research Institute

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. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is CHA Vaccine Research Institute?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that CHA Vaccine Research Institute had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of ₩8.3b and booked a ₩10b accounting loss. But the saving grace is the ₩30.5b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for CHA Vaccine Research Institute (1 is significant) you should be aware of.

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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.