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.' 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. Importantly, Jeil M&S Co., Ltd (KOSDAQ:412540) does carry debt. But should shareholders be worried about its use of debt?
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. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Jeil M&S
As you can see below, at the end of June 2024, Jeil M&S had ₩28.0b of debt, up from ₩19.2b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩28.9b in cash, so it actually has ₩928.2m net cash.
The latest balance sheet data shows that Jeil M&S had liabilities of ₩193.2b due within a year, and liabilities of ₩15.7b falling due after that. Offsetting these obligations, it had cash of ₩28.9b as well as receivables valued at ₩37.7b due within 12 months. So its liabilities total ₩142.2b more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Jeil M&S is worth ₩249.1b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Jeil M&S boasts net cash, so it's fair to say it does not have a heavy debt load!
Pleasingly, Jeil M&S is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 254% gain in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Jeil M&S's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Jeil M&S may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Jeil M&S burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
While Jeil M&S does have more liabilities than liquid assets, it also has net cash of ₩928.2m. And it impressed us with its EBIT growth of 254% over the last year. So while Jeil M&S does not have a great balance sheet, it's certainly not too bad. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Jeil M&S has 2 warning signs we think you should be aware of.
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.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.