Is SK bioscienceLtd (KRX:302440) Using Debt Sensibly?

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.' 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. As with many other companies SK bioscience Co.,Ltd. (KRX:302440) makes use of debt. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does SK bioscienceLtd Carry?

The image below, which you can click on for greater detail, shows that at December 2024 SK bioscienceLtd had debt of ₩383.3b, up from none in one year. However, its balance sheet shows it holds ₩1.16t in cash, so it actually has ₩774.8b net cash.

How Healthy Is SK bioscienceLtd's Balance Sheet?

We can see from the most recent balance sheet that SK bioscienceLtd had liabilities of ₩310.6b falling due within a year, and liabilities of ₩510.6b due beyond that. Offsetting this, it had ₩1.16t in cash and ₩188.4b in receivables that were due within 12 months. So it actually has ₩525.4b more liquid assets than total liabilities.

This surplus suggests that SK bioscienceLtd is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, SK bioscienceLtd boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine SK bioscienceLtd'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.

View our latest analysis for SK bioscienceLtd

In the last year SK bioscienceLtd had a loss before interest and tax, and actually shrunk its revenue by 28%, to ₩268b. That makes us nervous, to say the least.

So How Risky Is SK bioscienceLtd?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that SK bioscienceLtd had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of ₩300b and booked a ₩54b accounting loss. With only ₩774.8b on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. For riskier companies like SK bioscienceLtd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.