Is JVM (KOSDAQ:054950) Using Too Much Debt?

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, JVM Co., Ltd (KOSDAQ:054950) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for JVM

What Is JVM's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 JVM had debt of ₩26.8b, up from ₩19.5b in one year. However, its balance sheet shows it holds ₩36.1b in cash, so it actually has ₩9.38b net cash.

A Look At JVM's Liabilities

Zooming in on the latest balance sheet data, we can see that JVM had liabilities of ₩60.7b due within 12 months and liabilities of ₩2.76b due beyond that. Offsetting this, it had ₩36.1b in cash and ₩22.4b in receivables that were due within 12 months. So its liabilities total ₩4.83b more than the combination of its cash and short-term receivables.

Of course, JVM has a market capitalization of ₩203.3b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, JVM also has more cash than debt, so we're pretty confident it can manage its debt safely.

JVM's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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 JVM can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. JVM 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 three years, JVM actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that JVM has ₩9.38b in net cash. And it impressed us with free cash flow of ₩13b, being 102% of its EBIT. So we don't think JVM's use of debt is risky. 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. Be aware that JVM is showing 2 warning signs in our investment analysis , 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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