Here's Why ONEJOON (KOSDAQ:382840) Can Manage Its Debt Responsibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, ONEJOON Co., Ltd. (KOSDAQ:382840) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

See our latest analysis for ONEJOON

How Much Debt Does ONEJOON Carry?

As you can see below, at the end of June 2024, ONEJOON had ₩12.8b of debt, up from ₩4.75b a year ago. Click the image for more detail. But on the other hand it also has ₩38.4b in cash, leading to a ₩25.6b net cash position.

A Look At ONEJOON's Liabilities

We can see from the most recent balance sheet that ONEJOON had liabilities of ₩103.6b falling due within a year, and liabilities of ₩3.12b due beyond that. On the other hand, it had cash of ₩38.4b and ₩25.6b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩42.7b.

While this might seem like a lot, it is not so bad since ONEJOON has a market capitalization of ₩155.4b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, ONEJOON also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that ONEJOON grew its EBIT by 718% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 ONEJOON will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While ONEJOON 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. Over the last three years, ONEJOON recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While ONEJOON does have more liabilities than liquid assets, it also has net cash of ₩25.6b. And it impressed us with its EBIT growth of 718% over the last year. So we don't have any problem with ONEJOON'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 instance, we've identified 2 warning signs for ONEJOON (1 can't be ignored) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.