We Think Yuan Jen EnterprisesLtd (TPE:1725) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Yuan Jen Enterprises Co.,Ltd. (TPE:1725) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Yuan Jen EnterprisesLtd

How Much Debt Does Yuan Jen EnterprisesLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Yuan Jen EnterprisesLtd had NT$1.04b of debt in December 2020, down from NT$1.21b, one year before. However, its balance sheet shows it holds NT$2.82b in cash, so it actually has NT$1.79b net cash.

How Healthy Is Yuan Jen EnterprisesLtd's Balance Sheet?

We can see from the most recent balance sheet that Yuan Jen EnterprisesLtd had liabilities of NT$1.83b falling due within a year, and liabilities of NT$79.3m due beyond that. Offsetting these obligations, it had cash of NT$2.82b as well as receivables valued at NT$1.05b due within 12 months. So it actually has NT$1.96b more liquid assets than total liabilities.

This surplus strongly suggests that Yuan Jen EnterprisesLtd has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Yuan Jen EnterprisesLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Yuan Jen EnterprisesLtd saw its EBIT drop by 3.9% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Yuan Jen EnterprisesLtd'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Yuan Jen EnterprisesLtd 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. Over the last three years, Yuan Jen EnterprisesLtd actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Yuan Jen EnterprisesLtd has NT$1.79b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$281m, being 199% of its EBIT. So is Yuan Jen EnterprisesLtd's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Yuan Jen EnterprisesLtd (1 is significant) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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