Does Janfusun Fancyworld (GTSM:5701) Have A Healthy 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Janfusun Fancyworld Corp. (GTSM:5701) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Janfusun Fancyworld

What Is Janfusun Fancyworld's Net Debt?

As you can see below, Janfusun Fancyworld had NT$1.70b of debt at September 2020, down from NT$1.78b a year prior. However, it does have NT$107.5m in cash offsetting this, leading to net debt of about NT$1.59b.

How Strong Is Janfusun Fancyworld's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Janfusun Fancyworld had liabilities of NT$1.34b due within 12 months and liabilities of NT$972.0m due beyond that. Offsetting these obligations, it had cash of NT$107.5m as well as receivables valued at NT$18.6m due within 12 months. So its liabilities total NT$2.18b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the NT$685.1m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Janfusun Fancyworld would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Janfusun Fancyworld's earnings that will influence how the balance sheet holds up in the future. 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 Janfusun Fancyworld had a loss before interest and tax, and actually shrunk its revenue by 9.7%, to NT$479m. We would much prefer see growth.

Caveat Emptor

Importantly, Janfusun Fancyworld had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost NT$60m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost NT$105m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Janfusun Fancyworld that you should be aware of.

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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