J2KBIO (KOSDAQ:420570) Has A Rock Solid Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies J2KBIO Co., Ltd. (KOSDAQ:420570) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for J2KBIO

How Much Debt Does J2KBIO Carry?

The image below, which you can click on for greater detail, shows that J2KBIO had debt of ₩2.84b at the end of March 2024, a reduction from ₩4.59b over a year. However, its balance sheet shows it holds ₩15.4b in cash, so it actually has ₩12.6b net cash.

How Healthy Is J2KBIO's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that J2KBIO had liabilities of ₩4.70b due within 12 months and liabilities of ₩2.62b due beyond that. Offsetting this, it had ₩15.4b in cash and ₩6.55b in receivables that were due within 12 months. So it actually has ₩14.7b more liquid assets than total liabilities.

This short term liquidity is a sign that J2KBIO could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that J2KBIO has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, J2KBIO grew its EBIT by 92% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since J2KBIO 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. J2KBIO may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, J2KBIO's free cash flow amounted to 44% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that J2KBIO has net cash of ₩12.6b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 92% over the last year. So we don't think J2KBIO's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with J2KBIO (including 1 which doesn't sit too well with us) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.