Is Exicon (KOSDAQ:092870) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Exicon Co., Ltd. (KOSDAQ:092870) does carry debt. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Exicon

What Is Exicon's Debt?

The image below, which you can click on for greater detail, shows that Exicon had debt of ₩4.87b at the end of June 2020, a reduction from ₩21.3b over a year. But it also has ₩31.6b in cash to offset that, meaning it has ₩26.7b net cash.

How Strong Is Exicon's Balance Sheet?

According to the last reported balance sheet, Exicon had liabilities of ₩12.2b due within 12 months, and liabilities of ₩2.06b due beyond 12 months. On the other hand, it had cash of ₩31.6b and ₩1.60b worth of receivables due within a year. So it can boast ₩18.9b more liquid assets than total liabilities.

This surplus suggests that Exicon has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Exicon 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 ultimately the future profitability of the business will decide if Exicon can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Exicon reported revenue of ₩37b, which is a gain of 20%, 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 Exicon?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Exicon lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through ₩568m of cash and made a loss of ₩636m. While this does make the company a bit risky, it's important to remember it has net cash of ₩26.7b. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Exicon may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Exicon (1 shouldn't be ignored!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

If you decide to trade Exicon, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.