Would Jorjin Technologies (GTSM:4980) Be Better Off With Less Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Jorjin Technologies Inc. (GTSM:4980) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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, 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 Jorjin Technologies

What Is Jorjin Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Jorjin Technologies had NT$227.2m of debt, an increase on NT$184.4m, over one year. However, it does have NT$201.9m in cash offsetting this, leading to net debt of about NT$25.3m.

A Look At Jorjin Technologies's Liabilities

Zooming in on the latest balance sheet data, we can see that Jorjin Technologies had liabilities of NT$278.5m due within 12 months and liabilities of NT$51.4m due beyond that. Offsetting this, it had NT$201.9m in cash and NT$84.2m in receivables that were due within 12 months. So its liabilities total NT$43.8m more than the combination of its cash and short-term receivables.

Since publicly traded Jorjin Technologies shares are worth a total of NT$695.6m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jorjin Technologies 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.

Over 12 months, Jorjin Technologies made a loss at the EBIT level, and saw its revenue drop to NT$356m, which is a fall of 29%. That makes us nervous, to say the least.

Caveat Emptor

While Jorjin Technologies's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping NT$135m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through NT$53m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Jorjin Technologies (2 are a bit unpleasant) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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