Jayjun Cosmetic (KRX:025620) Is Carrying A Fair Bit Of Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Jayjun Cosmetic Co., Ltd. (KRX:025620) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Jayjun Cosmetic

What Is Jayjun Cosmetic's Debt?

As you can see below, Jayjun Cosmetic had ₩30.9b of debt at September 2020, down from ₩59.2b a year prior. However, because it has a cash reserve of ₩965.2m, its net debt is less, at about ₩29.9b.

How Strong Is Jayjun Cosmetic's Balance Sheet?

The latest balance sheet data shows that Jayjun Cosmetic had liabilities of ₩42.8b due within a year, and liabilities of ₩472.9m falling due after that. Offsetting this, it had ₩965.2m in cash and ₩29.7b in receivables that were due within 12 months. So it has liabilities totalling ₩12.7b more than its cash and near-term receivables, combined.

Given Jayjun Cosmetic has a market capitalization of ₩88.9b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jayjun Cosmetic 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.

In the last year Jayjun Cosmetic had a loss before interest and tax, and actually shrunk its revenue by 9.3%, to ₩40b. That's not what we would hope to see.

Caveat Emptor

Importantly, Jayjun Cosmetic had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping ₩40b. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. 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. Like risks, for instance. Every company has them, and we've spotted 4 warning signs for Jayjun Cosmetic (of which 2 can't be ignored!) you should know about.

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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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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