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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Jentech Precision Industrial

How Much Debt Does Jentech Precision Industrial Carry?

The image below, which you can click on for greater detail, shows that Jentech Precision Industrial had debt of NT$807.4m at the end of March 2024, a reduction from NT$1.52b over a year. But it also has NT$5.11b in cash to offset that, meaning it has NT$4.30b 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$4.47b falling due within a year, and liabilities of NT$732.6m due beyond that. On the other hand, it had cash of NT$5.11b and NT$2.71b worth of receivables due within a year. So it can boast NT$2.61b 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$160.4b 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!

On the other hand, Jentech Precision Industrial's EBIT dived 14%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. 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. 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 71% 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$4.30b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 71% of that EBIT to free cash flow, bringing in NT$2.5b. So we are not troubled with Jentech Precision Industrial's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Jentech Precision Industrial you should know about.

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.

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