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

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies CHA Vaccine Research Institute (KOSDAQ:261780) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for CHA Vaccine Research Institute

What Is CHA Vaccine Research Institute's Debt?

As you can see below, CHA Vaccine Research Institute had ₩4.20b of debt at March 2024, down from ₩23.9b a year prior. But it also has ₩36.7b in cash to offset that, meaning it has ₩32.5b net cash.

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

We can see from the most recent balance sheet that CHA Vaccine Research Institute had liabilities of ₩1.15b falling due within a year, and liabilities of ₩9.19b due beyond that. Offsetting this, it had ₩36.7b in cash and ₩1.21b in receivables that were due within 12 months. So it actually has ₩27.5b 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. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, CHA Vaccine Research Institute boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is CHA Vaccine Research Institute'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.

Over 12 months, CHA Vaccine Research Institute reported revenue of ₩543m, which is a gain of 195%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

So How Risky Is CHA Vaccine Research Institute?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year CHA Vaccine Research Institute had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through ₩5.9b of cash and made a loss of ₩1.5b. While this does make the company a bit risky, it's important to remember it has net cash of ₩32.5b. That kitty means the company can keep spending for growth for at least two years, at current rates. The good news for shareholders is that CHA Vaccine Research Institute has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example CHA Vaccine Research Institute has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.