JUSUNG ENGINEERINGLtd (KOSDAQ:036930) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, '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. Importantly, JUSUNG ENGINEERING Co.,Ltd. (KOSDAQ:036930) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, 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 2023; about the same as the year before. However, it does have ₩67.2b in cash offsetting this, leading to net cash of ₩22.2b.

How Strong Is JUSUNG ENGINEERINGLtd's Balance Sheet?

According to the last reported balance sheet, JUSUNG ENGINEERINGLtd had liabilities of ₩57.2b due within 12 months, and liabilities of ₩222.7b due beyond 12 months. Offsetting this, it had ₩67.2b in cash and ₩43.7b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩168.9b.

Since publicly traded JUSUNG ENGINEERINGLtd shares are worth a total of ₩1.75t, it seems unlikely that this level of liabilities would be a major 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.

It is just as well that JUSUNG ENGINEERINGLtd's load is not too heavy, because its EBIT was down 75% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 ENGINEERINGLtd'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While JUSUNG ENGINEERINGLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, JUSUNG ENGINEERINGLtd recorded free cash flow worth 50% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that JUSUNG ENGINEERINGLtd has ₩22.2b in net cash. So we are not troubled with JUSUNG ENGINEERINGLtd's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for JUSUNG ENGINEERINGLtd you should know about.

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. 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.