Rock star Growth Puts Jayjun Cosmetic (KRX:025620) In A Position To Use 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Jayjun Cosmetic Co., Ltd. (KRX:025620) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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, 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. 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 Jayjun Cosmetic

How Much Debt Does Jayjun Cosmetic Carry?

As you can see below, Jayjun Cosmetic had ₩2.14b of debt at September 2023, down from ₩4.26b a year prior. However, its balance sheet shows it holds ₩5.82b in cash, so it actually has ₩3.68b net cash.

How Healthy Is Jayjun Cosmetic's Balance Sheet?

We can see from the most recent balance sheet that Jayjun Cosmetic had liabilities of ₩8.37b falling due within a year, and liabilities of ₩433.6m due beyond that. Offsetting these obligations, it had cash of ₩5.82b as well as receivables valued at ₩9.49b due within 12 months. So it can boast ₩6.50b more liquid assets than total liabilities.

This excess liquidity suggests that Jayjun Cosmetic is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Jayjun Cosmetic boasts net cash, so it's fair to say it does not have a heavy debt load! 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Jayjun Cosmetic wasn't profitable at an EBIT level, but managed to grow its revenue by 67%, to ₩13b. With any luck the company will be able to grow its way to profitability.

So How Risky Is Jayjun Cosmetic?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Jayjun Cosmetic lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through ₩9.3b of cash and made a loss of ₩13b. With only ₩3.68b on the balance sheet, it would appear that its going to need to raise capital again soon. Jayjun Cosmetic's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Jayjun Cosmetic has 3 warning signs (and 1 which doesn't sit too well with us) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.