Jenn Feng Industrial (TPE:1538) Is Making Moderate Use Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Jenn Feng Industrial Co., Ltd. (TPE:1538) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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, 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.

Check out our latest analysis for Jenn Feng Industrial

How Much Debt Does Jenn Feng Industrial Carry?

As you can see below, Jenn Feng Industrial had NT$123.8m of debt at September 2020, down from NT$480.2m a year prior. On the flip side, it has NT$108.2m in cash leading to net debt of about NT$15.6m.

A Look At Jenn Feng Industrial's Liabilities

The latest balance sheet data shows that Jenn Feng Industrial had liabilities of NT$107.9m due within a year, and liabilities of NT$168.1m falling due after that. Offsetting these obligations, it had cash of NT$108.2m as well as receivables valued at NT$46.3m due within 12 months. So it has liabilities totalling NT$121.5m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of NT$198.1m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Jenn Feng Industrial'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.

In the last year Jenn Feng Industrial had a loss before interest and tax, and actually shrunk its revenue by 26%, to NT$284m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Jenn Feng Industrial's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping NT$99m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through NT$39m of cash over the last year. So in short it's a really 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. Be aware that Jenn Feng Industrial is showing 4 warning signs in our investment analysis , and 2 of those can't be ignored...

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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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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