Jentech Precision Industrial (TWSE:3653) Seems To Use Debt Quite Sensibly

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Jentech Precision Industrial Co., Ltd (TWSE:3653) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Jentech Precision Industrial

How Much Debt Does Jentech Precision Industrial Carry?

As you can see below, Jentech Precision Industrial had NT$740.8m of debt at December 2023, down from NT$2.17b a year prior. But on the other hand it also has NT$4.16b in cash, leading to a NT$3.41b net cash position.

How Strong Is Jentech Precision Industrial's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jentech Precision Industrial had liabilities of NT$2.79b due within 12 months and liabilities of NT$722.3m due beyond that. On the other hand, it had cash of NT$4.16b and NT$2.71b worth of receivables due within a year. So it actually has NT$3.36b more liquid assets than total liabilities.

This surplus suggests that Jentech Precision Industrial has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

But the bad news is that Jentech Precision Industrial has seen its EBIT plunge 12% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the most recent three years, Jentech Precision Industrial recorded free cash flow worth 64% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jentech Precision Industrial has NT$3.41b in net cash and a decent-looking balance sheet. So we are not troubled with Jentech Precision Industrial's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Jentech Precision Industrial , 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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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.