Health Check: How Prudently Does Janfusun Fancyworld (GTSM:5701) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Janfusun Fancyworld

What Is Janfusun Fancyworld's Debt?

The chart below, which you can click on for greater detail, shows that Janfusun Fancyworld had NT$1.70b in debt in December 2020; about the same as the year before. However, it also had NT$95.3m in cash, and so its net debt is NT$1.60b.

How Healthy Is Janfusun Fancyworld's Balance Sheet?

We can see from the most recent balance sheet that Janfusun Fancyworld had liabilities of NT$1.43b falling due within a year, and liabilities of NT$871.7m due beyond that. Offsetting these obligations, it had cash of NT$95.3m as well as receivables valued at NT$9.16m due within 12 months. So its liabilities total NT$2.20b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the NT$819.6m 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. At the end of the day, Janfusun Fancyworld would probably need a major re-capitalization if its creditors were to demand repayment. 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.

Over 12 months, Janfusun Fancyworld made a loss at the EBIT level, and saw its revenue drop to NT$460m, which is a fall of 16%. That's not what we would hope to see.

Caveat Emptor

While Janfusun Fancyworld's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost NT$77m 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. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of NT$137m in the last year. So we think this stock is quite risky. We'd prefer to pass. 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 Janfusun Fancyworld 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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