Does Shinpoong PharmaceuticalLtd (KRX:019170) Have A Healthy Balance Sheet?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Shinpoong Pharmaceutical Co.,Ltd (KRX:019170) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

View our latest analysis for Shinpoong PharmaceuticalLtd

What Is Shinpoong PharmaceuticalLtd's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Shinpoong PharmaceuticalLtd had debt of ₩44.0b, up from ₩30.0b in one year. However, it does have ₩59.1b in cash offsetting this, leading to net cash of ₩15.1b.

How Healthy Is Shinpoong PharmaceuticalLtd's Balance Sheet?

We can see from the most recent balance sheet that Shinpoong PharmaceuticalLtd had liabilities of ₩69.4b falling due within a year, and liabilities of ₩2.77b due beyond that. On the other hand, it had cash of ₩59.1b and ₩79.2b worth of receivables due within a year. So it actually has ₩66.1b more liquid assets than total liabilities.

This surplus suggests that Shinpoong PharmaceuticalLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Shinpoong PharmaceuticalLtd has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shinpoong PharmaceuticalLtd 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.

Over 12 months, Shinpoong PharmaceuticalLtd made a loss at the EBIT level, and saw its revenue drop to ₩209b, which is a fall of 2.3%. That's not what we would hope to see.

So How Risky Is Shinpoong PharmaceuticalLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Shinpoong PharmaceuticalLtd 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 ₩34b and booked a ₩42b accounting loss. However, it has net cash of ₩15.1b, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For instance, we've identified 1 warning sign for Shinpoong PharmaceuticalLtd that you should be aware of.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.