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

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.' 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. As with many other companies JCH Systems, Inc. (KOSDAQ:033320) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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

What Is JCH Systems's Debt?

As you can see below, JCH Systems had ₩15.8b of debt at March 2024, down from ₩20.2b a year prior. However, its balance sheet shows it holds ₩28.9b in cash, so it actually has ₩13.0b net cash.

How Strong Is JCH Systems' Balance Sheet?

We can see from the most recent balance sheet that JCH Systems had liabilities of ₩44.5b falling due within a year, and liabilities of ₩9.36b due beyond that. On the other hand, it had cash of ₩28.9b and ₩43.1b worth of receivables due within a year. So it can boast ₩18.1b more liquid assets than total liabilities.

This surplus suggests that JCH Systems is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since JCH Systems 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.

In the last year JCH Systems wasn't profitable at an EBIT level, but managed to grow its revenue by 20%, to ₩229b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is JCH Systems?

Although JCH Systems had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of ₩941m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Keeping in mind its 20% revenue growth over the last year, we think there's a decent chance the company is on track. There's no doubt fast top line growth can cure all manner of ills, for a stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for JCH Systems (of which 1 is a bit unpleasant!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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