Is JCH Systems (KOSDAQ:033320) Using Debt In A Risky Way?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, JCH Systems, Inc. (KOSDAQ:033320) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for JCH Systems

How Much Debt Does JCH Systems Carry?

You can click the graphic below for the historical numbers, but it shows that JCH Systems had ₩12.7b of debt in September 2024, down from ₩20.0b, one year before. But it also has ₩23.7b in cash to offset that, meaning it has ₩11.0b net cash.

A Look At JCH Systems' Liabilities

According to the last reported balance sheet, JCH Systems had liabilities of ₩33.4b due within 12 months, and liabilities of ₩7.01b due beyond 12 months. Offsetting these obligations, it had cash of ₩23.7b as well as receivables valued at ₩36.0b due within 12 months. So it can boast ₩19.4b more liquid assets than total liabilities.

This excess liquidity suggests that JCH Systems is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that JCH Systems has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is JCH Systems's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year JCH Systems wasn't profitable at an EBIT level, but managed to grow its revenue by 29%, to ₩250b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is JCH Systems?

While JCH Systems lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow ₩13b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Keeping in mind its 29% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. 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 3 warning signs for JCH Systems (1 shouldn't be ignored) 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.