Does Jui Li Enterprise (TPE:1512) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Jui Li Enterprise Co., Ltd. (TPE:1512) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Jui Li Enterprise

What Is Jui Li Enterprise's Debt?

The image below, which you can click on for greater detail, shows that Jui Li Enterprise had debt of NT$1.18b at the end of September 2020, a reduction from NT$1.37b over a year. However, it does have NT$148.5m in cash offsetting this, leading to net debt of about NT$1.03b.

How Healthy Is Jui Li Enterprise's Balance Sheet?

The latest balance sheet data shows that Jui Li Enterprise had liabilities of NT$1.03b due within a year, and liabilities of NT$971.7m falling due after that. Offsetting this, it had NT$148.5m in cash and NT$402.9m in receivables that were due within 12 months. So its liabilities total NT$1.45b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of NT$970.5m, we think shareholders really should watch Jui Li Enterprise's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Jui Li Enterprise will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Jui Li Enterprise had a loss before interest and tax, and actually shrunk its revenue by 42%, to NT$1.3b. That makes us nervous, to say the least.

Caveat Emptor

While Jui Li Enterprise'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 a very considerable NT$184m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of NT$469m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with Jui Li Enterprise (including 1 which is is potentially serious) .

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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This article by Simply Wall St is general in nature. 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.
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