Would IL Jeong IndustrialLtd (KRX:008500) Be Better Off With Less Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies IL Jeong Industrial Co.,Ltd (KRX:008500) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for IL Jeong IndustrialLtd

How Much Debt Does IL Jeong IndustrialLtd Carry?

The image below, which you can click on for greater detail, shows that IL Jeong IndustrialLtd had debt of ₩14.9b at the end of September 2020, a reduction from ₩24.5b over a year. However, because it has a cash reserve of ₩1.10b, its net debt is less, at about ₩13.8b.

How Healthy Is IL Jeong IndustrialLtd's Balance Sheet?

The latest balance sheet data shows that IL Jeong IndustrialLtd had liabilities of ₩9.92b due within a year, and liabilities of ₩10.5b falling due after that. Offsetting this, it had ₩1.10b in cash and ₩13.3b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩6.04b.

IL Jeong IndustrialLtd has a market capitalization of ₩21.6b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since IL Jeong IndustrialLtd 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.

Over 12 months, IL Jeong IndustrialLtd made a loss at the EBIT level, and saw its revenue drop to ₩31b, which is a fall of 30%. To be frank that doesn't bode well.

Caveat Emptor

Not only did IL Jeong IndustrialLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₩11b at the EBIT level. 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 ₩2.5b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. To that end, you should learn about the 4 warning signs we've spotted with IL Jeong IndustrialLtd (including 2 which are potentially serious) .

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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