Celltrion (KRX:068270) Has A Rock Solid 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. As with many other companies Celltrion, Inc. (KRX:068270) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Celltrion

What Is Celltrion's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Celltrion had ₩542.5b of debt, an increase on ₩493.0b, over one year. But it also has ₩692.6b in cash to offset that, meaning it has ₩150.1b net cash.

A Look At Celltrion's Liabilities

According to the last reported balance sheet, Celltrion had liabilities of ₩910.7b due within 12 months, and liabilities of ₩373.1b due beyond 12 months. Offsetting this, it had ₩692.6b in cash and ₩1.27t in receivables that were due within 12 months. So it can boast ₩678.0b more liquid assets than total liabilities.

Having regard to Celltrion's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₩49t company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Celltrion has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Celltrion grew its EBIT by 115% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Celltrion's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Celltrion 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. Looking at the most recent three years, Celltrion recorded free cash flow of 35% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Celltrion has ₩150.1b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 115% over the last year. So is Celltrion's debt a risk? It doesn't seem so to us. 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 Celltrion that you should be aware of.

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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