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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, JCH Systems, Inc. (KOSDAQ:033320) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for JCH Systems

How Much Debt Does JCH Systems Carry?

The image below, which you can click on for greater detail, shows that JCH Systems had debt of ₩14.9b at the end of December 2020, a reduction from ₩18.7b over a year. But on the other hand it also has ₩40.0b in cash, leading to a ₩25.0b net cash position.

How Healthy Is JCH Systems' Balance Sheet?

We can see from the most recent balance sheet that JCH Systems had liabilities of ₩39.8b falling due within a year, and liabilities of ₩2.23b due beyond that. On the other hand, it had cash of ₩40.0b and ₩48.0b worth of receivables due within a year. So it can boast ₩46.0b more liquid assets than total liabilities.

It's good to see that JCH Systems has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. 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.

Even more impressive was the fact that JCH Systems grew its EBIT by 313% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. During the last three years, JCH Systems generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that JCH Systems has net cash of ₩25.0b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩12b, being 89% of its EBIT. The bottom line is that we do not find JCH Systems's debt levels at all concerning. 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.

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. 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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