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.' 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. Importantly, JUNGDAWN Co., Ltd. (KOSDAQ:208140) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for JUNGDAWN
What Is JUNGDAWN's Net Debt?
As you can see below, at the end of December 2020, JUNGDAWN had ₩67.0b of debt, up from ₩56.5b a year ago. Click the image for more detail. However, because it has a cash reserve of ₩24.7b, its net debt is less, at about ₩42.3b.
How Healthy Is JUNGDAWN's Balance Sheet?
According to the last reported balance sheet, JUNGDAWN had liabilities of ₩53.9b due within 12 months, and liabilities of ₩27.0b due beyond 12 months. Offsetting this, it had ₩24.7b in cash and ₩29.2b in receivables that were due within 12 months. So its liabilities total ₩27.0b more than the combination of its cash and short-term receivables.
JUNGDAWN has a market capitalization of ₩108.3b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is JUNGDAWN'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.
In the last year JUNGDAWN's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.
Caveat Emptor
Over the last twelve months JUNGDAWN produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ₩1.2b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩3.6b of cash over the last year. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that JUNGDAWN is showing 5 warning signs in our investment analysis , and 3 of those are a bit concerning...
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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About KOSDAQ:A208140
JUNGDAWN
Engages in poultry farming, delivery, processing, and sales of duck meat and duck down.
Flawless balance sheet, good value and pays a dividend.
