Would ORIENT BIO (KRX:002630) Be Better Off With Less Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies ORIENT BIO Inc. (KRX:002630) 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 ORIENT BIO

What Is ORIENT BIO's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 ORIENT BIO had ₩7.24b of debt, an increase on ₩6.65b, over one year. However, because it has a cash reserve of ₩6.46b, its net debt is less, at about ₩775.8m.

A Look At ORIENT BIO's Liabilities

Zooming in on the latest balance sheet data, we can see that ORIENT BIO had liabilities of ₩16.3b due within 12 months and liabilities of ₩7.43b due beyond that. On the other hand, it had cash of ₩6.46b and ₩11.0b worth of receivables due within a year. So its liabilities total ₩6.20b more than the combination of its cash and short-term receivables.

Of course, ORIENT BIO has a market capitalization of ₩179.0b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Carrying virtually no net debt, ORIENT BIO has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since ORIENT BIO 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.

In the last year ORIENT BIO managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.

Caveat Emptor

Over the last twelve months ORIENT BIO produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₩2.2b at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₩594m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with ORIENT BIO (including 1 which doesn't sit too well with us) .

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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