Does Jourdeness Group (TPE:4190) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Jourdeness Group Limited (TPE:4190) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Jourdeness Group

How Much Debt Does Jourdeness Group Carry?

The chart below, which you can click on for greater detail, shows that Jourdeness Group had NT$1.06b in debt in September 2020; about the same as the year before. However, it does have NT$1.11b in cash offsetting this, leading to net cash of NT$55.3m.

How Healthy Is Jourdeness Group's Balance Sheet?

According to the last reported balance sheet, Jourdeness Group had liabilities of NT$3.38b due within 12 months, and liabilities of NT$1.32b due beyond 12 months. On the other hand, it had cash of NT$1.11b and NT$183.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$3.40b.

Jourdeness Group has a market capitalization of NT$6.03b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Jourdeness Group boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Jourdeness Group if management cannot prevent a repeat of the 29% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Jourdeness Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Jourdeness Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Jourdeness Group generated free cash flow amounting to a very robust 83% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While Jourdeness Group does have more liabilities than liquid assets, it also has net cash of NT$55.3m. And it impressed us with free cash flow of NT$575m, being 83% of its EBIT. So we don't have any problem with Jourdeness Group's use of debt. 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. To that end, you should be aware of the 3 warning signs we've spotted with Jourdeness Group .

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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