Is Chong Kun Dang Pharmaceutical (KRX:185750) Using Too Much Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Chong Kun Dang Pharmaceutical Corp. (KRX:185750) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 think about a company's use of debt, we first look at 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 Chong Kun Dang Pharmaceutical had debt of ₩209.2b at the end of June 2024, a reduction from ₩228.5b over a year. However, its balance sheet shows it holds ₩339.4b in cash, so it actually has ₩130.2b 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 ₩501.1b falling due within a year, and liabilities of ₩91.9b due beyond that. On the other hand, it had cash of ₩339.4b and ₩305.7b worth of receivables due within a year. So it can boast ₩52.1b more liquid assets than total liabilities.

This short term liquidity is a sign that Chong Kun Dang Pharmaceutical could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, 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 76%, thus reducing the spectre of future debt repayments. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Looking at the most recent three years, Chong Kun Dang Pharmaceutical recorded free cash flow of 48% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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 ₩130.2b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 76% over the last year. So we don't think Chong Kun Dang Pharmaceutical's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Chong Kun Dang Pharmaceutical that you should be aware of before investing here.

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.

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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.