Is J.ESTINALtd (KOSDAQ:026040) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that J.ESTINA Co.,Ltd. (KOSDAQ:026040) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 J.ESTINALtd

What Is J.ESTINALtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 J.ESTINALtd had ₩30.1b of debt, an increase on ₩26.9b, over one year. However, it does have ₩12.9b in cash offsetting this, leading to net debt of about ₩17.2b.

How Strong Is J.ESTINALtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that J.ESTINALtd had liabilities of ₩36.2b due within 12 months and liabilities of ₩1.45b due beyond that. On the other hand, it had cash of ₩12.9b and ₩5.44b worth of receivables due within a year. So it has liabilities totalling ₩19.3b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₩31.7b, so it does suggest shareholders should keep an eye on J.ESTINALtd's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is J.ESTINALtd's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year J.ESTINALtd had a loss before interest and tax, and actually shrunk its revenue by 39%, to ₩64b. That makes us nervous, to say the least.

Caveat Emptor

While J.ESTINALtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₩26b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₩5.9b in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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 3 warning signs for J.ESTINALtd you should be aware of, and 2 of them are a bit unpleasant.

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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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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