JOONGANG ADVANCED MATERIALS (KOSDAQ:051980) Is Carrying A Fair Bit Of Debt

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.' 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. We can see that JOONGANG ADVANCED MATERIALS Co., Ltd (KOSDAQ:051980) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

View our latest analysis for JOONGANG ADVANCED MATERIALS

What Is JOONGANG ADVANCED MATERIALS's Net Debt?

The image below, which you can click on for greater detail, shows that JOONGANG ADVANCED MATERIALS had debt of ₩38.9b at the end of June 2024, a reduction from ₩112.6b over a year. However, it does have ₩35.5b in cash offsetting this, leading to net debt of about ₩3.37b.

How Strong Is JOONGANG ADVANCED MATERIALS' Balance Sheet?

We can see from the most recent balance sheet that JOONGANG ADVANCED MATERIALS had liabilities of ₩26.9b falling due within a year, and liabilities of ₩19.8b due beyond that. On the other hand, it had cash of ₩35.5b and ₩29.0b worth of receivables due within a year. So it actually has ₩17.9b more liquid assets than total liabilities.

This state of affairs indicates that JOONGANG ADVANCED MATERIALS' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₩1.02t company is struggling for cash, we still think it's worth monitoring its balance sheet. But either way, JOONGANG ADVANCED MATERIALS has virtually no net debt, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since JOONGANG ADVANCED MATERIALS 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.

In the last year JOONGANG ADVANCED MATERIALS wasn't profitable at an EBIT level, but managed to grow its revenue by 4.5%, to ₩26b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months JOONGANG ADVANCED MATERIALS produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ₩1.1b. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. 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. Be aware that JOONGANG ADVANCED MATERIALS is showing 4 warning signs in our investment analysis , and 2 of those are significant...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.