Is JTC (KOSDAQ:950170) Weighed On By Its Debt Load?

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.' 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. Importantly, JTC Inc. (KOSDAQ:950170) does carry debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

Check out our latest analysis for JTC

What Is JTC's Net Debt?

The image below, which you can click on for greater detail, shows that JTC had debt of ₩44.8b at the end of November 2020, a reduction from ₩53.3b over a year. However, it does have ₩62.6b in cash offsetting this, leading to net cash of ₩17.8b.

A Look At JTC's Liabilities

Zooming in on the latest balance sheet data, we can see that JTC had liabilities of ₩59.0b due within 12 months and liabilities of ₩212.4b due beyond that. Offsetting this, it had ₩62.6b in cash and ₩6.73b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩202.0b.

When you consider that this deficiency exceeds the company's ₩172.6b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Given that JTC has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since JTC will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, JTC made a loss at the EBIT level, and saw its revenue drop to ₩96b, which is a fall of 84%. To be frank that doesn't bode well.

So How Risky Is JTC?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that JTC had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of ₩8.4b and booked a ₩74b accounting loss. Given it only has net cash of ₩17.8b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Be aware that JTC is showing 1 warning sign in our investment analysis , you should know about...

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. 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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