Jentech Precision Industrial (TPE:3653) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Jentech Precision Industrial Co., Ltd (TPE:3653) 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. 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 Jentech Precision Industrial

What Is Jentech Precision Industrial's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Jentech Precision Industrial had NT$1.49b of debt, an increase on none, over one year. But it also has NT$1.64b in cash to offset that, meaning it has NT$146.8m net cash.

How Strong Is Jentech Precision Industrial's Balance Sheet?

We can see from the most recent balance sheet that Jentech Precision Industrial had liabilities of NT$2.42b falling due within a year, and liabilities of NT$648.1m due beyond that. Offsetting these obligations, it had cash of NT$1.64b as well as receivables valued at NT$1.73b due within 12 months. So it can boast NT$302.5m more liquid assets than total liabilities.

Having regard to Jentech Precision Industrial'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$35.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Jentech Precision Industrial has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Jentech Precision Industrial has boosted its EBIT by 52%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jentech Precision Industrial 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Jentech Precision Industrial 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. In the last three years, Jentech Precision Industrial created free cash flow amounting to 4.5% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Jentech Precision Industrial has net cash of NT$146.8m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 52% over the last year. So is Jentech Precision Industrial's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Jentech Precision Industrial, 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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