Is Justem (KOSDAQ:417840) A Risky Investment?

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.' 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. We can see that Justem Co., Ltd. (KOSDAQ:417840) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Justem

What Is Justem's Net Debt?

As you can see below, Justem had ₩13.2b of debt at September 2024, down from ₩20.7b a year prior. On the flip side, it has ₩9.69b in cash leading to net debt of about ₩3.48b.

How Strong Is Justem's Balance Sheet?

The latest balance sheet data shows that Justem had liabilities of ₩29.3b due within a year, and liabilities of ₩2.45b falling due after that. Offsetting these obligations, it had cash of ₩9.69b as well as receivables valued at ₩7.08b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩15.0b.

While this might seem like a lot, it is not so bad since Justem has a market capitalization of ₩35.0b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Justem's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Justem made a loss at the EBIT level, and saw its revenue drop to ₩38b, which is a fall of 8.1%. We would much prefer see growth.

Caveat Emptor

Importantly, Justem had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable ₩9.4b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₩7.7b in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Case in point: We've spotted 3 warning signs for Justem you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.