Is Johnson Health Tech .Co (TWSE:1736) A Risky Investment?

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.' 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. Importantly, Johnson Health Tech .Co., Ltd. (TWSE:1736) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Johnson Health Tech .Co

How Much Debt Does Johnson Health Tech .Co Carry?

The image below, which you can click on for greater detail, shows that Johnson Health Tech .Co had debt of NT$14.5b at the end of June 2024, a reduction from NT$15.7b over a year. However, it does have NT$2.52b in cash offsetting this, leading to net debt of about NT$11.9b.

How Strong Is Johnson Health Tech .Co's Balance Sheet?

We can see from the most recent balance sheet that Johnson Health Tech .Co had liabilities of NT$20.0b falling due within a year, and liabilities of NT$8.34b due beyond that. Offsetting this, it had NT$2.52b in cash and NT$9.80b in receivables that were due within 12 months. So it has liabilities totalling NT$16.0b more than its cash and near-term receivables, combined.

Johnson Health Tech .Co has a market capitalization of NT$35.4b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Johnson Health Tech .Co has a debt to EBITDA ratio of 4.9, which signals significant debt, but is still pretty reasonable for most types of business. However, its interest coverage of 19.3 is very high, suggesting that the interest expense on the debt is currently quite low. Pleasingly, Johnson Health Tech .Co is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 767% gain in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Johnson Health Tech .Co's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last two years, Johnson Health Tech .Co actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

Johnson Health Tech .Co's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But the stark truth is that we are concerned by its net debt to EBITDA. Taking all this data into account, it seems to us that Johnson Health Tech .Co takes a pretty sensible approach to debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. 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. Be aware that Johnson Health Tech .Co is showing 2 warning signs in our investment analysis , you should know about...

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.