Is Jentech Precision Industrial (TWSE:3653) A Risky Investment?

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. As with many other companies Jentech Precision Industrial Co., Ltd (TWSE:3653) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Jentech Precision Industrial

What Is Jentech Precision Industrial's Debt?

The chart below, which you can click on for greater detail, shows that Jentech Precision Industrial had NT$786.7m in debt in June 2024; about the same as the year before. However, it does have NT$5.22b in cash offsetting this, leading to net cash of NT$4.43b.

A Look At Jentech Precision Industrial's Liabilities

The latest balance sheet data shows that Jentech Precision Industrial had liabilities of NT$4.85b due within a year, and liabilities of NT$698.6m falling due after that. On the other hand, it had cash of NT$5.22b and NT$3.15b worth of receivables due within a year. So it actually has NT$2.82b 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$212.2b 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.

The good news is that Jentech Precision Industrial has increased its EBIT by 5.1% over twelve months, which should ease any concerns about debt repayment. 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 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Jentech Precision Industrial 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, Jentech Precision Industrial produced sturdy free cash flow equating to 73% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

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$4.43b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$2.4b, being 73% of its EBIT. So we don't think Jentech Precision Industrial'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. For example - Jentech Precision Industrial has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.