JETEMA (KOSDAQ:216080) Is Carrying A Fair Bit Of Debt

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. As with many other companies JETEMA, Co., Ltd. (KOSDAQ:216080) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for JETEMA

How Much Debt Does JETEMA Carry?

The image below, which you can click on for greater detail, shows that at September 2020 JETEMA had debt of ₩15.4b, up from ₩14.1b in one year. However, because it has a cash reserve of ₩13.1b, its net debt is less, at about ₩2.30b.

How Healthy Is JETEMA's Balance Sheet?

According to the last reported balance sheet, JETEMA had liabilities of ₩22.8b due within 12 months, and liabilities of ₩4.10b due beyond 12 months. Offsetting this, it had ₩13.1b in cash and ₩7.09b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩6.78b.

Having regard to JETEMA's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₩384.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, JETEMA has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since JETEMA 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.

Over 12 months, JETEMA reported revenue of ₩16b, which is a gain of 23%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate JETEMA's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost ₩11b at the EBIT level. 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. Another cause for caution is that is bled ₩9.5b in negative free cash flow over the last twelve months. So to be blunt we think it is 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 instance, we've identified 2 warning signs for JETEMA that you should be aware of.

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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