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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, JASTECH, Ltd. (KOSDAQ:090470) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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 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. 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 JASTECH
What Is JASTECH's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 JASTECH had ₩20.6b of debt, an increase on ₩9.91b, over one year. However, it also had ₩12.2b in cash, and so its net debt is ₩8.39b.
A Look At JASTECH's Liabilities
We can see from the most recent balance sheet that JASTECH had liabilities of ₩30.9b falling due within a year, and liabilities of ₩1.08b due beyond that. Offsetting these obligations, it had cash of ₩12.2b as well as receivables valued at ₩23.9b due within 12 months. So it actually has ₩4.17b more liquid assets than total liabilities.
This surplus suggests that JASTECH has a conservative balance sheet, and could probably eliminate its debt without much difficulty. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since JASTECH 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.
Over 12 months, JASTECH reported revenue of ₩131b, which is a gain of 4.4%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Importantly, JASTECH had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₩6.9b. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. 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 example JASTECH has 3 warning signs (and 1 which is concerning) we think 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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About KOSDAQ:A090470
Excellent balance sheet minimal.