Yuan Jen EnterprisesLtd (TWSE:1725) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Yuan Jen Enterprises Co.,Ltd. (TWSE:1725) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Yuan Jen EnterprisesLtd

What Is Yuan Jen EnterprisesLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Yuan Jen EnterprisesLtd had NT$1.94b of debt in September 2024, down from NT$2.16b, one year before. But it also has NT$5.06b in cash to offset that, meaning it has NT$3.12b net cash.

How Strong Is Yuan Jen EnterprisesLtd's Balance Sheet?

The latest balance sheet data shows that Yuan Jen EnterprisesLtd had liabilities of NT$2.51b due within a year, and liabilities of NT$76.0m falling due after that. On the other hand, it had cash of NT$5.06b and NT$979.2m worth of receivables due within a year. So it actually has NT$3.46b 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). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Yuan Jen EnterprisesLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Yuan Jen EnterprisesLtd grew its EBIT by 12% last year, making its debt load easier to handle. 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 Yuan Jen EnterprisesLtd 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.

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 conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Yuan Jen EnterprisesLtd has NT$3.12b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 123% of that EBIT to free cash flow, bringing in NT$267m. When it comes to Yuan Jen EnterprisesLtd's debt, we sufficiently relaxed that our mind turns to the jacuzzi. Over time, share prices tend to follow earnings per share, so if you're interested in Yuan Jen EnterprisesLtd, you may well want to click here to check an interactive graph of its earnings per share history.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.