Here's Why S.Biomedics (KOSDAQ:304360) Can Afford Some 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.' 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 S.Biomedics Co., Ltd. (KOSDAQ:304360) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for S.Biomedics

What Is S.Biomedics's Net Debt?

As you can see below, S.Biomedics had ₩11.5b of debt at March 2024, down from ₩13.1b a year prior. However, it also had ₩9.56b in cash, and so its net debt is ₩1.92b.

A Look At S.Biomedics' Liabilities

The latest balance sheet data shows that S.Biomedics had liabilities of ₩7.45b due within a year, and liabilities of ₩11.8b falling due after that. Offsetting this, it had ₩9.56b in cash and ₩1.65b in receivables that were due within 12 months. So its liabilities total ₩8.06b more than the combination of its cash and short-term receivables.

This state of affairs indicates that S.Biomedics' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₩441.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, S.Biomedics has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But it is S.Biomedics'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.

In the last year S.Biomedics's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months S.Biomedics produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ₩6.1b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₩8.1b in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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 2 warning signs with S.Biomedics , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com