Is SK Biopharmaceuticals (KRX:326030) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that SK Biopharmaceuticals Co., Ltd. (KRX:326030) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for SK Biopharmaceuticals

What Is SK Biopharmaceuticals's Net Debt?

As you can see below, SK Biopharmaceuticals had ₩145.5b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds ₩267.5b in cash, so it actually has ₩122.0b net cash.

How Healthy Is SK Biopharmaceuticals' Balance Sheet?

The latest balance sheet data shows that SK Biopharmaceuticals had liabilities of ₩338.5b due within a year, and liabilities of ₩70.3b falling due after that. Offsetting this, it had ₩267.5b in cash and ₩137.8b in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that SK Biopharmaceuticals' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₩9.01t company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, SK Biopharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load!

Although SK Biopharmaceuticals made a loss at the EBIT level, last year, it was also good to see that it generated ₩70b in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine SK Biopharmaceuticals's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. SK Biopharmaceuticals 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. Over the last year, SK Biopharmaceuticals reported free cash flow worth 10% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

We could understand if investors are concerned about SK Biopharmaceuticals's liabilities, but we can be reassured by the fact it has has net cash of ₩122.0b. So we don't have any problem with SK Biopharmaceuticals's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for SK Biopharmaceuticals 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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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.