OK Biotech (TPE:4155) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that OK Biotech Co., Ltd. (TPE:4155) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See our latest analysis for OK Biotech

What Is OK Biotech's Net Debt?

As you can see below, OK Biotech had NT$497.6m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have NT$569.1m in cash offsetting this, leading to net cash of NT$71.5m.

A Look At OK Biotech's Liabilities

We can see from the most recent balance sheet that OK Biotech had liabilities of NT$581.4m falling due within a year, and liabilities of NT$284.5m due beyond that. Offsetting this, it had NT$569.1m in cash and NT$314.4m in receivables that were due within 12 months. So it actually has NT$17.7m more liquid assets than total liabilities.

Having regard to OK Biotech's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the NT$2.53b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that OK Biotech has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, OK Biotech grew its EBIT by 6.3% in the last year, making that debt load look even more manageable. 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 OK Biotech'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. While OK Biotech has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, OK Biotech created free cash flow amounting to 17% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to investigate a company's debt, in this case OK Biotech has NT$71.5m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 6.3% over the last year. So we don't have any problem with OK Biotech's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - OK Biotech has 3 warning signs we think you should be aware of.

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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