These 4 Measures Indicate That WITHUS PHARMACEUTICALLTD (KOSDAQ:330350) Is Using Debt Reasonably Well

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 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. Importantly, WITHUS PHARMACEUTICAL Co.,LTD. (KOSDAQ:330350) does carry debt. But the more important question is: how much risk is that debt creating?

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

What Is WITHUS PHARMACEUTICALLTD's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 WITHUS PHARMACEUTICALLTD had ₩21.0b of debt, an increase on ₩18.1b, over one year. However, it does have ₩8.65b in cash offsetting this, leading to net debt of about ₩12.4b.

A Look At WITHUS PHARMACEUTICALLTD's Liabilities

According to the last reported balance sheet, WITHUS PHARMACEUTICALLTD had liabilities of ₩31.8b due within 12 months, and liabilities of ₩7.95b due beyond 12 months. Offsetting this, it had ₩8.65b in cash and ₩31.3b in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to WITHUS PHARMACEUTICALLTD's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₩81.9b company is short on cash, but still worth keeping an eye on the balance sheet.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

WITHUS PHARMACEUTICALLTD's net debt is only 1.0 times its EBITDA. And its EBIT covers its interest expense a whopping 43.3 times over. So we're pretty relaxed about its super-conservative use of debt. Even more impressive was the fact that WITHUS PHARMACEUTICALLTD grew its EBIT by 168% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is WITHUS PHARMACEUTICALLTD'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, WITHUS PHARMACEUTICALLTD saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Happily, WITHUS PHARMACEUTICALLTD's impressive interest cover implies it has the upper hand on its debt. But we must concede we find its conversion of EBIT to free cash flow has the opposite effect. Looking at all the aforementioned factors together, it strikes us that WITHUS PHARMACEUTICALLTD can handle its debt fairly comfortably. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that WITHUS PHARMACEUTICALLTD is showing 2 warning signs in our investment analysis , and 1 of those is potentially serious...

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.