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. We can see that Aprogen pharmaceuticals,Inc. (KRX:003060) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Aprogen pharmaceuticalsInc
What Is Aprogen pharmaceuticalsInc's Net Debt?
As you can see below, Aprogen pharmaceuticalsInc had ₩3.45b of debt at September 2020, down from ₩9.98b a year prior. But on the other hand it also has ₩241.1b in cash, leading to a ₩237.7b net cash position.
How Strong Is Aprogen pharmaceuticalsInc's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Aprogen pharmaceuticalsInc had liabilities of ₩10.6b due within 12 months and liabilities of ₩9.15b due beyond that. On the other hand, it had cash of ₩241.1b and ₩205.0b worth of receivables due within a year. So it can boast ₩426.4b more liquid assets than total liabilities.
This surplus liquidity suggests that Aprogen pharmaceuticalsInc's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Simply put, the fact that Aprogen pharmaceuticalsInc has more cash than debt is arguably a good indication that it can manage its debt safely.
It was also good to see that despite losing money on the EBIT line last year, Aprogen pharmaceuticalsInc turned things around in the last 12 months, delivering and EBIT of ₩3.8m. There's no doubt that we learn most about debt from the balance sheet. But it is Aprogen pharmaceuticalsInc'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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Aprogen pharmaceuticalsInc 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. Happily for any shareholders, Aprogen pharmaceuticalsInc actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Aprogen pharmaceuticalsInc has net cash of ₩237.7b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩2.7b, being 72,095% of its EBIT. So we don't think Aprogen pharmaceuticalsInc's use of debt is risky. 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. Like risks, for instance. Every company has them, and we've spotted 2 warning signs for Aprogen pharmaceuticalsInc (of which 1 can't be ignored!) you should know about.
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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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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About KOSE:A003060
Aprogen Biologics
Manufactures and sells pharmaceutical products primarily in South Korea.
Adequate balance sheet low.
