Is JW Pharmaceutical (KRX:001060) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies JW Pharmaceutical Corporation (KRX:001060) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for JW Pharmaceutical

How Much Debt Does JW Pharmaceutical Carry?

You can click the graphic below for the historical numbers, but it shows that JW Pharmaceutical had ₩160.0b of debt in September 2020, down from ₩197.6b, one year before. However, because it has a cash reserve of ₩42.8b, its net debt is less, at about ₩117.2b.

A Look At JW Pharmaceutical's Liabilities

According to the last reported balance sheet, JW Pharmaceutical had liabilities of ₩261.6b due within 12 months, and liabilities of ₩83.6b due beyond 12 months. Offsetting these obligations, it had cash of ₩42.8b as well as receivables valued at ₩148.1b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩154.4b.

This deficit isn't so bad because JW Pharmaceutical is worth ₩658.8b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is JW Pharmaceutical's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, JW Pharmaceutical saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months JW Pharmaceutical produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ₩32b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of ₩31b. So in short it's a really risky stock. 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 2 warning signs for JW Pharmaceutical (1 can't be ignored!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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