Is ORIENT BIO (KRX:002630) Weighed On By Its Debt Load?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, ORIENT BIO Inc. (KRX:002630) does carry debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for ORIENT BIO

What Is ORIENT BIO's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 ORIENT BIO had debt of ₩7.32b, up from ₩6.65b in one year. However, its balance sheet shows it holds ₩8.18b in cash, so it actually has ₩861.3m net cash.

How Healthy Is ORIENT BIO's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ORIENT BIO had liabilities of ₩20.9b due within 12 months and liabilities of ₩7.56b due beyond that. Offsetting these obligations, it had cash of ₩8.18b as well as receivables valued at ₩8.68b due within 12 months. So its liabilities total ₩11.6b more than the combination of its cash and short-term receivables.

Since publicly traded ORIENT BIO shares are worth a total of ₩231.2b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, ORIENT BIO boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is ORIENT BIO'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.

While it hasn't made a profit, at least ORIENT BIO booked its first revenue as a publicly listed company, in the last twelve months.

So How Risky Is ORIENT BIO?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that ORIENT BIO had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of ₩4.5b and booked a ₩13b accounting loss. With only ₩861.3m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for ORIENT BIO (1 doesn't sit too well with us) you should be aware of.

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. 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.
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