Would Jeju Air (KRX:089590) Be Better Off With Less Debt?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Jeju Air Co., Ltd. (KRX:089590) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Jeju Air

How Much Debt Does Jeju Air Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Jeju Air had debt of ₩279.1b, up from ₩67.3b in one year. On the flip side, it has ₩180.9b in cash leading to net debt of about ₩98.2b.

A Look At Jeju Air's Liabilities

The latest balance sheet data shows that Jeju Air had liabilities of ₩458.9b due within a year, and liabilities of ₩492.9b falling due after that. Offsetting this, it had ₩180.9b in cash and ₩45.1b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩725.7b.

This deficit is considerable relative to its market capitalization of ₩891.6b, so it does suggest shareholders should keep an eye on Jeju Air's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jeju Air'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.

Over 12 months, Jeju Air made a loss at the EBIT level, and saw its revenue drop to ₩377b, which is a fall of 73%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Jeju Air's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₩358b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩304b of cash over the last year. So suffice it to say we consider the stock very risky. 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 Jeju Air is showing 2 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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