Is Ildong Pharmaceutical (KRX:249420) A Risky Investment?

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 note that Ildong Pharmaceutical Co., Ltd. (KRX:249420) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Ildong Pharmaceutical

What Is Ildong Pharmaceutical's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Ildong Pharmaceutical had ₩193.3b of debt, an increase on ₩158.6b, over one year. However, because it has a cash reserve of ₩73.3b, its net debt is less, at about ₩119.9b.

A Look At Ildong Pharmaceutical's Liabilities

Zooming in on the latest balance sheet data, we can see that Ildong Pharmaceutical had liabilities of ₩274.6b due within 12 months and liabilities of ₩149.0b due beyond that. Offsetting this, it had ₩73.3b in cash and ₩64.0b in receivables that were due within 12 months. So it has liabilities totalling ₩286.2b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of ₩419.0b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 Ildong 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.

In the last year Ildong Pharmaceutical had a loss before interest and tax, and actually shrunk its revenue by 2.9%, to ₩606b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Ildong Pharmaceutical produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₩39b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩44b of cash over the last year. So suffice it to say we consider the stock very 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. Be aware that Ildong Pharmaceutical is showing 1 warning sign in our investment analysis , you should know about...

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.