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. We note that Chong Kun Dang Pharmaceutical Corp. (KRX:185750) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Chong Kun Dang Pharmaceutical

What Is Chong Kun Dang Pharmaceutical's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Chong Kun Dang Pharmaceutical had debt of ₩131.0b, up from ₩111.0b in one year. However, its balance sheet shows it holds ₩161.9b in cash, so it actually has ₩30.9b net cash.

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

The latest balance sheet data shows that Chong Kun Dang Pharmaceutical had liabilities of ₩320.6b due within a year, and liabilities of ₩74.1b falling due after that. On the other hand, it had cash of ₩161.9b and ₩219.5b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩13.4b.

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 ₩1.73t company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Chong Kun Dang Pharmaceutical boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Chong Kun Dang Pharmaceutical has boosted its EBIT by 66%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Chong Kun Dang Pharmaceutical can strengthen its balance sheet over time. 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 company can only pay off debt with cold hard cash, not accounting profits. 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. Over the most recent three years, Chong Kun Dang Pharmaceutical recorded free cash flow worth 50% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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 ₩30.9b. And it impressed us with its EBIT growth of 66% over the last year. So is Chong Kun Dang Pharmaceutical's debt a risk? It doesn't seem so to us. 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 instance, we've identified 1 warning sign for Chong Kun Dang Pharmaceutical that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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