Is Jhen Vei Electronic (GTSM:3520) 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. We note that Jhen Vei Electronic Co., Ltd. (GTSM:3520) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Jhen Vei Electronic

What Is Jhen Vei Electronic's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Jhen Vei Electronic had debt of NT$104.3m, up from NT$72.3m in one year. However, it does have NT$163.5m in cash offsetting this, leading to net cash of NT$59.2m.

A Look At Jhen Vei Electronic's Liabilities

The latest balance sheet data shows that Jhen Vei Electronic had liabilities of NT$432.0m due within a year, and liabilities of NT$98.4m falling due after that. Offsetting this, it had NT$163.5m in cash and NT$530.0m in receivables that were due within 12 months. So it can boast NT$163.1m more liquid assets than total liabilities.

This excess liquidity suggests that Jhen Vei Electronic is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Jhen Vei Electronic has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Jhen Vei Electronic grew its EBIT by 20% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jhen Vei Electronic will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Jhen Vei Electronic 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. Over the last three years, Jhen Vei Electronic saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Jhen Vei Electronic has net cash of NT$59.2m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 20% over the last year. So we are not troubled with Jhen Vei Electronic'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. For instance, we've identified 3 warning signs for Jhen Vei Electronic that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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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