Is Jeju Semiconductor (KOSDAQ:080220) Using Too Much Debt?

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 note that Jeju Semiconductor Corp. (KOSDAQ:080220) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Jeju Semiconductor

What Is Jeju Semiconductor's Debt?

You can click the graphic below for the historical numbers, but it shows that Jeju Semiconductor had ₩47.2b of debt in September 2020, down from ₩73.1b, one year before. However, it does have ₩67.5b in cash offsetting this, leading to net cash of ₩20.4b.

How Healthy Is Jeju Semiconductor's Balance Sheet?

The latest balance sheet data shows that Jeju Semiconductor had liabilities of ₩94.3b due within a year, and liabilities of ₩14.9b falling due after that. Offsetting this, it had ₩67.5b in cash and ₩24.9b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩16.8b.

Since publicly traded Jeju Semiconductor shares are worth a total of ₩172.3b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Jeju Semiconductor boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Jeju Semiconductor's EBIT launched higher than Elon Musk, gaining a whopping 194% on last year. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jeju Semiconductor 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Jeju Semiconductor 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. During the last three years, Jeju Semiconductor burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

We could understand if investors are concerned about Jeju Semiconductor's liabilities, but we can be reassured by the fact it has has net cash of ₩20.4b. And it impressed us with its EBIT growth of 194% over the last year. So we are not troubled with Jeju Semiconductor's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Jeju Semiconductor (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

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.

If you’re looking to trade Jeju Semiconductor, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.