Is GeneOne Life Science (KRX:011000) Using Debt In A Risky Way?

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.' 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. Importantly, GeneOne Life Science, Inc. (KRX:011000) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for GeneOne Life Science

What Is GeneOne Life Science's Debt?

As you can see below, at the end of December 2020, GeneOne Life Science had ₩15.6b of debt, up from ₩11.3b a year ago. Click the image for more detail. But on the other hand it also has ₩90.5b in cash, leading to a ₩74.9b net cash position.

A Look At GeneOne Life Science's Liabilities

According to the last reported balance sheet, GeneOne Life Science had liabilities of ₩36.7b due within 12 months, and liabilities of ₩1.36b due beyond 12 months. Offsetting this, it had ₩90.5b in cash and ₩8.40b in receivables that were due within 12 months. So it actually has ₩60.9b more liquid assets than total liabilities.

This short term liquidity is a sign that GeneOne Life Science could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, GeneOne Life Science 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 GeneOne Life Science 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 GeneOne Life Science's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

So How Risky Is GeneOne Life Science?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that GeneOne Life Science 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 ₩32b and booked a ₩19b accounting loss. However, it has net cash of ₩74.9b, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with GeneOne Life Science (including 1 which makes us a bit uncomfortable) .

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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