We Think JW Lifescience (KRX:234080) Can Manage Its Debt With Ease

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. We can see that JW Lifescience Corporation (KRX:234080) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for JW Lifescience

What Is JW Lifescience's Debt?

You can click the graphic below for the historical numbers, but it shows that JW Lifescience had ₩36.3b of debt in December 2020, down from ₩44.5b, one year before. However, because it has a cash reserve of ₩2.59b, its net debt is less, at about ₩33.7b.

A Look At JW Lifescience's Liabilities

We can see from the most recent balance sheet that JW Lifescience had liabilities of ₩69.3b falling due within a year, and liabilities of ₩16.7b due beyond that. Offsetting these obligations, it had cash of ₩2.59b as well as receivables valued at ₩36.6b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩46.8b.

Of course, JW Lifescience has a market capitalization of ₩310.4b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

JW Lifescience has a low net debt to EBITDA ratio of only 0.65. And its EBIT covers its interest expense a whopping 33.4 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On top of that, JW Lifescience grew its EBIT by 33% 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 it is future earnings, more than anything, that will determine JW Lifescience's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, JW Lifescience produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

Happily, JW Lifescience's impressive interest cover implies it has the upper hand on its debt. And the good news does not stop there, as its EBIT growth rate also supports that impression! Considering this range of factors, it seems to us that JW Lifescience is quite prudent with its debt, and the risks seem well managed. So the balance sheet looks pretty healthy, to us. 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. Case in point: We've spotted 1 warning sign for JW Lifescience 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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