SCM Lifescience (KOSDAQ:298060) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that SCM Lifescience Co., Ltd. (KOSDAQ:298060) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for SCM Lifescience

What Is SCM Lifescience's Net Debt?

As you can see below, SCM Lifescience had ₩3.63b of debt at June 2024, down from ₩5.63b a year prior. But on the other hand it also has ₩6.55b in cash, leading to a ₩2.92b net cash position.

How Healthy Is SCM Lifescience's Balance Sheet?

According to the last reported balance sheet, SCM Lifescience had liabilities of ₩1.18b due within 12 months, and liabilities of ₩4.29b due beyond 12 months. Offsetting these obligations, it had cash of ₩6.55b as well as receivables valued at ₩200.1m due within 12 months. So it actually has ₩1.28b more liquid assets than total liabilities.

This surplus suggests that SCM Lifescience has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that SCM Lifescience 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 it is SCM Lifescience'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.

In the last year SCM Lifescience wasn't profitable at an EBIT level, but managed to grow its revenue by 185%, to ₩1.0b. So there's no doubt that shareholders are cheering for growth

So How Risky Is SCM Lifescience?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months SCM Lifescience lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of ₩12b and booked a ₩19b accounting loss. Given it only has net cash of ₩2.92b, the company may need to raise more capital if it doesn't reach break-even soon. The good news for shareholders is that SCM Lifescience 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. We've identified 4 warning signs with SCM Lifescience (at least 2 which are potentially serious) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.