Here's Why Prestige BioPharma (KRX:950210) Can Manage Its Debt Despite Losing Money

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, Prestige BioPharma Limited (KRX:950210) does carry debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Prestige BioPharma

What Is Prestige BioPharma's Debt?

As you can see below, Prestige BioPharma had ₩103.5b of debt at June 2024, down from ₩112.6b a year prior. However, it does have ₩228.8b in cash offsetting this, leading to net cash of ₩125.3b.

How Healthy Is Prestige BioPharma's Balance Sheet?

We can see from the most recent balance sheet that Prestige BioPharma had liabilities of ₩145.9b falling due within a year, and liabilities of ₩50.4b due beyond that. On the other hand, it had cash of ₩228.8b and ₩391.6m worth of receivables due within a year. So it can boast ₩33.0b more liquid assets than total liabilities.

This surplus suggests that Prestige BioPharma is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Prestige BioPharma boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Prestige BioPharma will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Prestige BioPharma wasn't profitable at an EBIT level, but managed to grow its revenue by 326%, to ₩689m. That's virtually the hole-in-one of revenue growth!

So How Risky Is Prestige BioPharma?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Prestige BioPharma 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 ₩76b and booked a ₩33b accounting loss. But the saving grace is the ₩125.3b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. The good news for shareholders is that Prestige BioPharma has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Prestige BioPharma (of which 2 shouldn't be ignored!) you should know about.

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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