Is JW Holdings (KRX:096760) Using Too Much 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.' 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. We can see that JW Holdings Corporation (KRX:096760) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for JW Holdings

How Much Debt Does JW Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that JW Holdings had ₩524.2b of debt in September 2020, down from ₩549.4b, one year before. However, because it has a cash reserve of ₩110.8b, its net debt is less, at about ₩413.4b.

A Look At JW Holdings' Liabilities

According to the last reported balance sheet, JW Holdings had liabilities of ₩629.3b due within 12 months, and liabilities of ₩238.3b due beyond 12 months. On the other hand, it had cash of ₩110.8b and ₩256.0b worth of receivables due within a year. So it has liabilities totalling ₩500.8b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of ₩351.0b, we think shareholders really should watch JW Holdings's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is JW Holdings'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 Holdings reported revenue of ₩752b, which is a gain of 3.1%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, JW Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₩1.6b at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of ₩29b. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for JW Holdings (1 is potentially serious) 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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