Is Jayjun Cosmetic (KRX:025620) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Jayjun Cosmetic Co., Ltd. (KRX:025620) makes use of debt. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Jayjun Cosmetic's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Jayjun Cosmetic had debt of ₩4.26b, up from ₩2.11b in one year. However, because it has a cash reserve of ₩4.01b, its net debt is less, at about ₩255.2m.

A Look At Jayjun Cosmetic's Liabilities

According to the last reported balance sheet, Jayjun Cosmetic had liabilities of ₩8.91b due within 12 months, and liabilities of ₩368.9m due beyond 12 months. Offsetting this, it had ₩4.01b in cash and ₩4.78b in receivables that were due within 12 months. So its liabilities total ₩489.4m more than the combination of its cash and short-term receivables.

Given Jayjun Cosmetic has a market capitalization of ₩15.7b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Jayjun Cosmetic'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.

Check out our latest analysis for Jayjun Cosmetic

In the last year Jayjun Cosmetic had a loss before interest and tax, and actually shrunk its revenue by 2.6%, to ₩16b. We would much prefer see growth.

Caveat Emptor

Importantly, Jayjun Cosmetic had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping ₩6.7b. 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. Another cause for caution is that is bled ₩7.2b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Jayjun Cosmetic has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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. 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.