Jinan Acetate Chemical (TPE:4763) Seems To Use Debt Rather Sparingly

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Jinan Acetate Chemical Co., Ltd. (TPE:4763) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Jinan Acetate Chemical

What Is Jinan Acetate Chemical's Net Debt?

As you can see below, at the end of September 2020, Jinan Acetate Chemical had NT$1.01b of debt, up from NT$583.9m a year ago. Click the image for more detail. However, it does have NT$1.02b in cash offsetting this, leading to net cash of NT$16.5m.

A Look At Jinan Acetate Chemical's Liabilities

The latest balance sheet data shows that Jinan Acetate Chemical had liabilities of NT$1.07b due within a year, and liabilities of NT$618.5m falling due after that. Offsetting these obligations, it had cash of NT$1.02b as well as receivables valued at NT$589.1m due within 12 months. So it has liabilities totalling NT$74.2m more than its cash and near-term receivables, combined.

Having regard to Jinan Acetate Chemical's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the NT$6.40b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Jinan Acetate Chemical also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Jinan Acetate Chemical grew its EBIT by 54% over the last twelve months, and that growth will make it easier to handle its debt. 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 Jinan Acetate Chemical can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Jinan Acetate Chemical 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. Looking at the most recent three years, Jinan Acetate Chemical recorded free cash flow of 43% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Jinan Acetate Chemical has NT$16.5m in net cash. And we liked the look of last year's 54% year-on-year EBIT growth. So we don't think Jinan Acetate Chemical's use of debt is risky. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Jinan Acetate Chemical , and understanding them should be part of your investment process.

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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