Is Cell Bio Human TechLtd (KOSDAQ:318160) A Risky Investment?

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. As with many other companies Cell Bio Human Tech Co.,Ltd (KOSDAQ:318160) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 Cell Bio Human TechLtd

What Is Cell Bio Human TechLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Cell Bio Human TechLtd had ₩5.82b of debt in June 2024, down from ₩7.02b, one year before. However, its balance sheet shows it holds ₩16.8b in cash, so it actually has ₩11.0b net cash.

How Strong Is Cell Bio Human TechLtd's Balance Sheet?

According to the last reported balance sheet, Cell Bio Human TechLtd had liabilities of ₩7.99b due within 12 months, and liabilities of ₩234.5m due beyond 12 months. Offsetting this, it had ₩16.8b in cash and ₩3.64b in receivables that were due within 12 months. So it actually has ₩12.2b more liquid assets than total liabilities.

This surplus liquidity suggests that Cell Bio Human TechLtd's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Cell Bio Human TechLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Cell Bio Human TechLtd's EBIT dived 15%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Cell Bio Human TechLtd will need earnings to service that debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Cell Bio Human TechLtd 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, Cell Bio Human TechLtd generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Cell Bio Human TechLtd has net cash of ₩11.0b, as well as more liquid assets than liabilities. The cherry on top was that in converted 89% of that EBIT to free cash flow, bringing in ₩6.1b. So we don't think Cell Bio Human TechLtd's use of debt 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. For example, we've discovered 2 warning signs for Cell Bio Human TechLtd (1 is significant!) that you should be aware of before investing here.

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.