Here's Why HLB bioStepLtd (KOSDAQ:278650) Has A Meaningful Debt Burden

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 HLB bioStep Co.,Ltd. (KOSDAQ:278650) does use debt in its business. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. 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.

See our latest analysis for HLB bioStepLtd

What Is HLB bioStepLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that HLB bioStepLtd had ₩59.2b of debt in September 2023, down from ₩91.8b, one year before. But on the other hand it also has ₩78.7b in cash, leading to a ₩19.5b net cash position.

How Strong Is HLB bioStepLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that HLB bioStepLtd had liabilities of ₩60.0b due within 12 months and liabilities of ₩6.33b due beyond that. On the other hand, it had cash of ₩78.7b and ₩5.10b worth of receivables due within a year. So it can boast ₩17.5b more liquid assets than total liabilities.

This surplus suggests that HLB bioStepLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, HLB bioStepLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that HLB bioStepLtd's EBIT was down 76% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since HLB bioStepLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. HLB bioStepLtd 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, HLB bioStepLtd 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 it is always sensible to investigate a company's debt, in this case HLB bioStepLtd has ₩19.5b in net cash and a decent-looking balance sheet. Despite the cash, we do find HLB bioStepLtd's EBIT growth rate concerning, so we're not particularly comfortable with the stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for HLB bioStepLtd (of which 1 is potentially serious!) 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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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.