JCH Systems (KOSDAQ:033320) Has A Rock Solid Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for JCH Systems

What Is JCH Systems's Debt?

The image below, which you can click on for greater detail, shows that JCH Systems had debt of ₩15.8b at the end of September 2020, a reduction from ₩19.8b over a year. However, it does have ₩31.3b in cash offsetting this, leading to net cash of ₩15.5b.

A Look At JCH Systems' Liabilities

We can see from the most recent balance sheet that JCH Systems had liabilities of ₩31.4b falling due within a year, and liabilities of ₩2.38b due beyond that. Offsetting these obligations, it had cash of ₩31.3b as well as receivables valued at ₩42.6b due within 12 months. So it actually has ₩40.2b 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. Succinctly put, JCH Systems boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that JCH Systems grew its EBIT by 262% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since JCH Systems will need earnings to service that debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. JCH Systems may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, JCH Systems recorded free cash flow of 36% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case JCH Systems has ₩15.5b in net cash and a decent-looking balance sheet. And we liked the look of last year's 262% year-on-year EBIT growth. So is JCH Systems's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in JCH Systems, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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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