These 4 Measures Indicate That Jentech Precision Industrial (TWSE:3653) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Jentech Precision Industrial Co., Ltd (TWSE:3653) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

View 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$70.0m of debt at September 2024, down from NT$680.4m a year prior. However, it does have NT$3.41b in cash offsetting this, leading to net cash of NT$3.34b.

A Look At Jentech Precision Industrial's Liabilities

Zooming in on the latest balance sheet data, we can see that Jentech Precision Industrial had liabilities of NT$2.98b due within 12 months and liabilities of NT$388.7m due beyond that. On the other hand, it had cash of NT$3.41b and NT$3.33b worth of receivables due within a year. So it can boast NT$3.38b more liquid assets than total liabilities.

This state of affairs indicates that Jentech Precision Industrial's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the NT$178.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Jentech Precision Industrial boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Jentech Precision Industrial grew its EBIT by 13% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is Jentech Precision Industrial's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, Jentech Precision Industrial produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. 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$3.34b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$2.2b, being 72% of its EBIT. So we don't think Jentech Precision Industrial's use of debt is risky. 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. For example - Jentech Precision Industrial has 1 warning sign we think you should be aware of.

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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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.