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.' 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 can see that Justem Co., Ltd. (KOSDAQ:417840) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. 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?
The chart below, which you can click on for greater detail, shows that Justem had ₩20.6b in debt in March 2024; about the same as the year before. However, it does have ₩14.0b in cash offsetting this, leading to net debt of about ₩6.57b.
A Look At Justem's Liabilities
Zooming in on the latest balance sheet data, we can see that Justem had liabilities of ₩14.4b due within 12 months and liabilities of ₩22.4b due beyond that. Offsetting these obligations, it had cash of ₩14.0b as well as receivables valued at ₩4.19b due within 12 months. So it has liabilities totalling ₩18.6b more than its cash and near-term receivables, combined.
This deficit isn't so bad because Justem is worth ₩52.6b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Justem can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Justem had a loss before interest and tax, and actually shrunk its revenue by 26%, to ₩32b. That makes us nervous, to say the least.
Caveat Emptor
Not only did Justem's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₩6.9b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩23b of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Justem has 4 warning signs we think you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
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About KOSDAQ:A417840
Justem
Manufactures and sells semiconductors and display parts in South Korea.
Exceptional growth potential with mediocre balance sheet.
