Jeju Semiconductor (KOSDAQ:080220) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Jeju Semiconductor Corp. (KOSDAQ:080220) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for Jeju Semiconductor

What Is Jeju Semiconductor's Debt?

As you can see below, Jeju Semiconductor had ₩62.5b of debt at June 2020, down from ₩79.3b a year prior. But on the other hand it also has ₩64.6b in cash, leading to a ₩2.01b net cash position.

A Look At Jeju Semiconductor's Liabilities

The latest balance sheet data shows that Jeju Semiconductor had liabilities of ₩113.6b due within a year, and liabilities of ₩10.3b falling due after that. Offsetting this, it had ₩64.6b in cash and ₩33.0b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩26.4b.

This deficit isn't so bad because Jeju Semiconductor is worth ₩115.9b, 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. While it does have liabilities worth noting, Jeju Semiconductor also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly, Jeju Semiconductor grew its EBIT by 95% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jeju Semiconductor will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. Over the last three years, Jeju Semiconductor saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While Jeju Semiconductor does have more liabilities than liquid assets, it also has net cash of ₩2.01b. And it impressed us with its EBIT growth of 95% over the last year. So we don't have any problem with Jeju Semiconductor's use of debt. 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. For instance, we've identified 4 warning signs for Jeju Semiconductor (1 shouldn't be ignored) you should be aware of.

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. 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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