Is GemVax&KAELLtd (KOSDAQ:082270) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 GemVax&KAEL Co.,Ltd (KOSDAQ:082270) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for GemVax&KAELLtd

What Is GemVax&KAELLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that GemVax&KAELLtd had ₩9.53b of debt in September 2020, down from ₩20.3b, one year before. But it also has ₩53.5b in cash to offset that, meaning it has ₩43.9b net cash.

A Look At GemVax&KAELLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that GemVax&KAELLtd had liabilities of ₩21.5b due within 12 months and liabilities of ₩5.18b due beyond that. Offsetting this, it had ₩53.5b in cash and ₩12.9b in receivables that were due within 12 months. So it actually has ₩39.7b more liquid assets than total liabilities.

This surplus suggests that GemVax&KAELLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that GemVax&KAELLtd has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since GemVax&KAELLtd 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.

Over 12 months, GemVax&KAELLtd reported revenue of ₩62b, which is a gain of 37%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is GemVax&KAELLtd?

Although GemVax&KAELLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₩1.0b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We think its revenue growth of 37% is a good sign. We'd see further strong growth as an optimistic indication. 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 2 warning signs for GemVax&KAELLtd you should be aware of, and 1 of them shouldn't be ignored.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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.
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