Jeil Steel Mfg (KOSDAQ:023440) Is Making Moderate Use Of 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.' 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 Jeil Steel Mfg Co., Ltd. (KOSDAQ:023440) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 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 Jeil Steel Mfg

What Is Jeil Steel Mfg's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Jeil Steel Mfg had debt of ₩20.4b, up from ₩12.2b in one year. However, because it has a cash reserve of ₩4.94b, its net debt is less, at about ₩15.5b.

How Strong Is Jeil Steel Mfg's Balance Sheet?

According to the last reported balance sheet, Jeil Steel Mfg had liabilities of ₩25.7b due within 12 months, and liabilities of ₩7.40b due beyond 12 months. Offsetting this, it had ₩4.94b in cash and ₩5.92b in receivables that were due within 12 months. So its liabilities total ₩22.3b more than the combination of its cash and short-term receivables.

Jeil Steel Mfg has a market capitalization of ₩68.7b, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Jeil Steel Mfg'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.

In the last year Jeil Steel Mfg wasn't profitable at an EBIT level, but managed to grow its revenue by 26%, to ₩33b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Jeil Steel Mfg's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at ₩5.0b. 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 ₩4.5b of cash over the last year. So suffice it to say we consider the stock very 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. For example, we've discovered 3 warning signs for Jeil Steel Mfg (1 is concerning!) that you should be aware of before investing here.

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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