Chong Kun Dang Pharmaceutical (KRX:185750) Seems To Use Debt Rather Sparingly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Chong Kun Dang Pharmaceutical Corp. (KRX:185750) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 Chong Kun Dang Pharmaceutical

What Is Chong Kun Dang Pharmaceutical's Debt?

As you can see below, Chong Kun Dang Pharmaceutical had ₩209.5b of debt at March 2024, down from ₩234.6b a year prior. However, its balance sheet shows it holds ₩393.3b in cash, so it actually has ₩183.8b net cash.

How Strong Is Chong Kun Dang Pharmaceutical's Balance Sheet?

We can see from the most recent balance sheet that Chong Kun Dang Pharmaceutical had liabilities of ₩502.4b falling due within a year, and liabilities of ₩86.0b due beyond that. On the other hand, it had cash of ₩393.3b and ₩275.3b worth of receivables due within a year. So it actually has ₩80.2b more liquid assets than total liabilities.

This surplus suggests that Chong Kun Dang Pharmaceutical has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Chong Kun Dang Pharmaceutical boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Chong Kun Dang Pharmaceutical grew its EBIT by 111% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Chong Kun Dang Pharmaceutical'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Chong Kun Dang Pharmaceutical 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. During the last three years, Chong Kun Dang Pharmaceutical produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Chong Kun Dang Pharmaceutical has net cash of ₩183.8b, as well as more liquid assets than liabilities. And we liked the look of last year's 111% year-on-year EBIT growth. So we don't think Chong Kun Dang Pharmaceutical's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Chong Kun Dang Pharmaceutical that you should be aware of before investing here.

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.