JTEC (TYO:2479) Has A Pretty Healthy Balance Sheet

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. Importantly, JTEC Corporation (TYO:2479) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for JTEC

What Is JTEC's Debt?

As you can see below, at the end of December 2020, JTEC had JP¥290.0m of debt, up from JP¥166.0m a year ago. Click the image for more detail. However, it does have JP¥1.13b in cash offsetting this, leading to net cash of JP¥837.0m.

A Look At JTEC's Liabilities

The latest balance sheet data shows that JTEC had liabilities of JP¥447.0m due within a year, and liabilities of JP¥376.0m falling due after that. On the other hand, it had cash of JP¥1.13b and JP¥331.0m worth of receivables due within a year. So it actually has JP¥635.0m more liquid assets than total liabilities.

This luscious liquidity implies that JTEC's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that JTEC has more cash than debt is arguably a good indication that it can manage its debt safely.

Importantly, JTEC's EBIT fell a jaw-dropping 89% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. But it is JTEC'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While JTEC has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, JTEC recorded free cash flow worth 71% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case JTEC has JP¥837.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥72m, being 71% of its EBIT. So we are not troubled with JTEC's debt use. 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 JTEC is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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