Does JUSUNG ENGINEERING (KOSDAQ:036930) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that JUSUNG ENGINEERING Co., Ltd. (KOSDAQ:036930) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for JUSUNG ENGINEERING

What Is JUSUNG ENGINEERING's Net Debt?

The chart below, which you can click on for greater detail, shows that JUSUNG ENGINEERING had ₩116.7b in debt in September 2020; about the same as the year before. However, because it has a cash reserve of ₩8.91b, its net debt is less, at about ₩107.8b.

How Strong Is JUSUNG ENGINEERING's Balance Sheet?

According to the last reported balance sheet, JUSUNG ENGINEERING had liabilities of ₩52.1b due within 12 months, and liabilities of ₩225.5b due beyond 12 months. Offsetting these obligations, it had cash of ₩8.91b as well as receivables valued at ₩26.1b due within 12 months. So it has liabilities totalling ₩242.6b more than its cash and near-term receivables, combined.

This deficit isn't so bad because JUSUNG ENGINEERING is worth ₩489.7b, 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 future earnings, more than anything, that will determine JUSUNG ENGINEERING's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, JUSUNG ENGINEERING made a loss at the EBIT level, and saw its revenue drop to ₩150b, which is a fall of 45%. To be frank that doesn't bode well.

Caveat Emptor

Not only did JUSUNG ENGINEERING's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₩14b. 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. However, it doesn't help that it burned through ₩92b of cash over the last year. So in short it's a really risky stock. 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. To that end, you should be aware of the 1 warning sign we've spotted with JUSUNG ENGINEERING .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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