Bukwang Pharmaceutical (KRX:003000) Has Debt But No Earnings; Should You Worry?

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.' 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. Importantly, Bukwang Pharmaceutical Co., Ltd. (KRX:003000) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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 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 Bukwang Pharmaceutical

What Is Bukwang Pharmaceutical's Debt?

As you can see below, at the end of June 2024, Bukwang Pharmaceutical had ₩78.7b of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has ₩109.2b in cash, leading to a ₩30.5b net cash position.

How Healthy Is Bukwang Pharmaceutical's Balance Sheet?

The latest balance sheet data shows that Bukwang Pharmaceutical had liabilities of ₩29.4b due within a year, and liabilities of ₩90.6b falling due after that. Offsetting this, it had ₩109.2b in cash and ₩23.1b in receivables that were due within 12 months. So it actually has ₩12.4b more liquid assets than total liabilities.

This short term liquidity is a sign that Bukwang Pharmaceutical could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Bukwang Pharmaceutical 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 you can't view debt in total isolation; since Bukwang Pharmaceutical will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Bukwang Pharmaceutical made a loss at the EBIT level, and saw its revenue drop to ₩117b, which is a fall of 39%. That makes us nervous, to say the least.

So How Risky Is Bukwang Pharmaceutical?

Although Bukwang Pharmaceutical had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₩21b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Bukwang Pharmaceutical that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.