JUSUNG ENGINEERINGLtd (KOSDAQ:036930) Could Easily Take On More Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that JUSUNG ENGINEERING Co.,Ltd. (KOSDAQ:036930) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for JUSUNG ENGINEERINGLtd

What Is JUSUNG ENGINEERINGLtd's Debt?

The chart below, which you can click on for greater detail, shows that JUSUNG ENGINEERINGLtd had ₩45.0b in debt in September 2024; about the same as the year before. But it also has ₩232.2b in cash to offset that, meaning it has ₩187.2b net cash.

How Healthy Is JUSUNG ENGINEERINGLtd's Balance Sheet?

According to the last reported balance sheet, JUSUNG ENGINEERINGLtd had liabilities of ₩132.4b due within 12 months, and liabilities of ₩230.7b due beyond 12 months. On the other hand, it had cash of ₩232.2b and ₩21.5b worth of receivables due within a year. So its liabilities total ₩109.4b more than the combination of its cash and short-term receivables.

Given JUSUNG ENGINEERINGLtd has a market capitalization of ₩1.37t, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, JUSUNG ENGINEERINGLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, JUSUNG ENGINEERINGLtd grew its EBIT by 211% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if JUSUNG ENGINEERINGLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. JUSUNG ENGINEERINGLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, JUSUNG ENGINEERINGLtd recorded free cash flow worth 80% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that JUSUNG ENGINEERINGLtd has ₩187.2b in net cash. And it impressed us with its EBIT growth of 211% over the last year. So is JUSUNG ENGINEERINGLtd's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in JUSUNG ENGINEERINGLtd, you may well want to click here to check an interactive graph of its earnings per share history.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.