Does Myungmoon Pharm (KRX:017180) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We can see that Myungmoon Pharm. Co., LTD. (KRX:017180) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Myungmoon Pharm

What Is Myungmoon Pharm's Debt?

You can click the graphic below for the historical numbers, but it shows that Myungmoon Pharm had ₩97.5b of debt in September 2020, down from ₩114.6b, one year before. On the flip side, it has ₩23.9b in cash leading to net debt of about ₩73.6b.

How Healthy Is Myungmoon Pharm's Balance Sheet?

According to the last reported balance sheet, Myungmoon Pharm had liabilities of ₩130.5b due within 12 months, and liabilities of ₩34.1b due beyond 12 months. On the other hand, it had cash of ₩23.9b and ₩43.9b worth of receivables due within a year. So it has liabilities totalling ₩96.9b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Myungmoon Pharm has a market capitalization of ₩242.4b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Myungmoon Pharm 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.

In the last year Myungmoon Pharm had a loss before interest and tax, and actually shrunk its revenue by 12%, to ₩134b. We would much prefer see growth.

Caveat Emptor

While Myungmoon Pharm's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable ₩28b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₩11b in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. Case in point: We've spotted 3 warning signs for Myungmoon Pharm you should be aware of, and 2 of them shouldn't be ignored.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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