Is Jahwa Electronics (KRX:033240) A Risky Investment?

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. As with many other companies Jahwa Electronics. Co., Ltd (KRX:033240) makes use of debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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.

See our latest analysis for Jahwa Electronics

How Much Debt Does Jahwa Electronics Carry?

As you can see below, at the end of September 2020, Jahwa Electronics had ₩43.9b of debt, up from ₩26.6b a year ago. Click the image for more detail. But it also has ₩98.9b in cash to offset that, meaning it has ₩54.9b net cash.

A Look At Jahwa Electronics' Liabilities

According to the last reported balance sheet, Jahwa Electronics had liabilities of ₩61.3b due within 12 months, and liabilities of ₩19.0b due beyond 12 months. Offsetting these obligations, it had cash of ₩98.9b as well as receivables valued at ₩58.8b due within 12 months. So it can boast ₩77.4b more liquid assets than total liabilities.

It's good to see that Jahwa Electronics 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 Jahwa Electronics 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 it is future earnings, more than anything, that will determine Jahwa Electronics's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Jahwa Electronics had a loss before interest and tax, and actually shrunk its revenue by 22%, to ₩287b. To be frank that doesn't bode well.

So How Risky Is Jahwa Electronics?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Jahwa Electronics had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through ₩43b of cash and made a loss of ₩11b. With only ₩54.9b on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 example, we've discovered 1 warning sign for Jahwa Electronics that you should be aware of before investing here.

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.

When trading Jahwa Electronics or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.