Would Jenn Feng Industrial (TPE:1538) 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Jenn Feng Industrial Co., Ltd. (TPE:1538) does use debt in its business. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out our latest analysis for Jenn Feng Industrial

What Is Jenn Feng Industrial's Debt?

You can click the graphic below for the historical numbers, but it shows that Jenn Feng Industrial had NT$123.8m of debt in September 2020, down from NT$480.2m, one year before. However, it does have NT$108.2m in cash offsetting this, leading to net debt of about NT$15.6m.

How Strong Is Jenn Feng Industrial's Balance Sheet?

According to the last reported balance sheet, Jenn Feng Industrial had liabilities of NT$107.9m due within 12 months, and liabilities of NT$168.1m due beyond 12 months. Offsetting this, it had NT$108.2m in cash and NT$46.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$121.5m.

This deficit is considerable relative to its market capitalization of NT$161.9m, so it does suggest shareholders should keep an eye on Jenn Feng Industrial's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jenn Feng Industrial 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.

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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through NT$39m of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Jenn Feng Industrial (2 make us uncomfortable) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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