Is Bukwang Pharmaceutical (KRX:003000) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Bukwang Pharmaceutical Co., Ltd. (KRX:003000) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Bukwang Pharmaceutical

How Much Debt Does Bukwang Pharmaceutical Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Bukwang Pharmaceutical had debt of ₩20.0b, up from none in one year. But it also has ₩89.0b in cash to offset that, meaning it has ₩69.0b net cash.

How Healthy Is Bukwang Pharmaceutical's Balance Sheet?

We can see from the most recent balance sheet that Bukwang Pharmaceutical had liabilities of ₩56.5b falling due within a year, and liabilities of ₩61.8b due beyond that. Offsetting this, it had ₩89.0b in cash and ₩100.1b in receivables that were due within 12 months. So it actually has ₩70.8b more liquid assets than total liabilities.

This surplus suggests that Bukwang Pharmaceutical has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Bukwang Pharmaceutical has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Bukwang Pharmaceutical grew its EBIT by 115% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Bukwang Pharmaceutical 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Bukwang Pharmaceutical 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. Over the last three years, Bukwang Pharmaceutical saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Bukwang Pharmaceutical has ₩69.0b in net cash and a decent-looking balance sheet. And we liked the look of last year's 115% year-on-year EBIT growth. So we are not troubled with Bukwang Pharmaceutical's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Bukwang Pharmaceutical that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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