Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Jindo.Co., Ltd. (KRX:088790) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Jindo.Co
What Is Jindo.Co's Net Debt?
The image below, which you can click on for greater detail, shows that Jindo.Co had debt of ₩26.1b at the end of September 2020, a reduction from ₩41.5b over a year. However, it also had ₩927.0m in cash, and so its net debt is ₩25.1b.
How Strong Is Jindo.Co's Balance Sheet?
We can see from the most recent balance sheet that Jindo.Co had liabilities of ₩30.8b falling due within a year, and liabilities of ₩1.59b due beyond that. On the other hand, it had cash of ₩927.0m and ₩3.15b worth of receivables due within a year. So it has liabilities totalling ₩28.3b more than its cash and near-term receivables, combined.
This deficit isn't so bad because Jindo.Co is worth ₩49.0b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Jindo.Co's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Jindo.Co made a loss at the EBIT level, and saw its revenue drop to ₩59b, which is a fall of 35%. To be frank that doesn't bode well.
Caveat Emptor
While Jindo.Co's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₩2.2b 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. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of ₩753m. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Jindo.Co you should be aware of, and 1 of them can't be ignored.
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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About KOSE:A088790
Jindo.Co
Manufactures, distributes, and sells fashion products in South Korea.
Flawless balance sheet and good value.
