Stock Analysis

Is Jeonjinbio (KOSDAQ:110020) Using Debt Sensibly?

KOSDAQ:A110020
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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that Jeonjinbio Co., Ltd. (KOSDAQ:110020) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Jeonjinbio

What Is Jeonjinbio's Debt?

As you can see below, at the end of December 2020, Jeonjinbio had ₩5.11b of debt, up from ₩2.39b a year ago. Click the image for more detail. But it also has ₩8.92b in cash to offset that, meaning it has ₩3.82b net cash.

debt-equity-history-analysis
KOSDAQ:A110020 Debt to Equity History April 13th 2021

How Strong Is Jeonjinbio's Balance Sheet?

We can see from the most recent balance sheet that Jeonjinbio had liabilities of ₩7.34b falling due within a year, and liabilities of ₩70.0m due beyond that. Offsetting these obligations, it had cash of ₩8.92b as well as receivables valued at ₩181.0m due within 12 months. So it can boast ₩1.69b more liquid assets than total liabilities.

This surplus suggests that Jeonjinbio has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Jeonjinbio has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jeonjinbio 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 Jeonjinbio had a loss before interest and tax, and actually shrunk its revenue by 2.2%, to ₩3.9b. That's not what we would hope to see.

So How Risky Is Jeonjinbio?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Jeonjinbio had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through ₩8.1b of cash and made a loss of ₩3.4b. With only ₩3.82b on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Jeonjinbio has 3 warning signs we think you should be aware of.

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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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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