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 note that Shin Poong Pharm.Co.,Ltd. (KRX:019170) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Shin Poong Pharm.Co.Ltd
What Is Shin Poong Pharm.Co.Ltd's Net Debt?
The chart below, which you can click on for greater detail, shows that Shin Poong Pharm.Co.Ltd had ₩106.0b in debt in September 2020; about the same as the year before. However, it does have ₩292.8b in cash offsetting this, leading to net cash of ₩186.8b.
How Healthy Is Shin Poong Pharm.Co.Ltd's Balance Sheet?
According to the last reported balance sheet, Shin Poong Pharm.Co.Ltd had liabilities of ₩159.2b due within 12 months, and liabilities of ₩60.3b due beyond 12 months. Offsetting these obligations, it had cash of ₩292.8b as well as receivables valued at ₩95.8b due within 12 months. So it actually has ₩169.1b more liquid assets than total liabilities.
This state of affairs indicates that Shin Poong Pharm.Co.Ltd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₩9.78t company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Shin Poong Pharm.Co.Ltd boasts net cash, so it's fair to say it does not have a heavy debt load!
Shareholders should be aware that Shin Poong Pharm.Co.Ltd's EBIT was down 42% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shin Poong Pharm.Co.Ltd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shin Poong Pharm.Co.Ltd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Shin Poong Pharm.Co.Ltd actually produced more free cash flow than EBIT. 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 Shin Poong Pharm.Co.Ltd has net cash of ₩186.8b, as well as more liquid assets than liabilities. The cherry on top was that in converted 300% of that EBIT to free cash flow, bringing in ₩15b. So we are not troubled with Shin Poong Pharm.Co.Ltd's debt use. 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 be aware of the 3 warning signs we've spotted with Shin Poong Pharm.Co.Ltd .
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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:A019170
Shinpoong PharmaceuticalLtd
Manufactures and sells pharmaceutical products in South Korea.
Flawless balance sheet minimal.
