Does Chong Kun Dang Pharmaceutical (KRX:185750) 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Chong Kun Dang Pharmaceutical Corp. (KRX:185750) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Chong Kun Dang Pharmaceutical

What Is Chong Kun Dang Pharmaceutical's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Chong Kun Dang Pharmaceutical had debt of ₩157.0b, up from ₩110.1b in one year. But it also has ₩180.6b in cash to offset that, meaning it has ₩23.6b net cash.

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

Zooming in on the latest balance sheet data, we can see that Chong Kun Dang Pharmaceutical had liabilities of ₩347.8b due within 12 months and liabilities of ₩71.7b due beyond that. Offsetting this, it had ₩180.6b in cash and ₩232.5b in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Chong Kun Dang Pharmaceutical's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₩2.38t company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Chong Kun Dang Pharmaceutical also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Chong Kun Dang Pharmaceutical grew its EBIT by 82% over the last twelve months, and that growth will make it easier to handle its debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Chong Kun Dang Pharmaceutical 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. In the last three years, Chong Kun Dang Pharmaceutical's free cash flow amounted to 47% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

We could understand if investors are concerned about Chong Kun Dang Pharmaceutical's liabilities, but we can be reassured by the fact it has has net cash of ₩23.6b. And it impressed us with its EBIT growth of 82% over the last year. So is Chong Kun Dang Pharmaceutical's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Chong Kun Dang Pharmaceutical is showing 2 warning signs in our investment analysis , and 1 of those is significant...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

If you decide to trade Chong Kun Dang Pharmaceutical, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.