Jhen Vei Electronic (GTSM:3520) Seems To Use Debt Quite Sensibly

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.' 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 the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Jhen Vei Electronic

What Is Jhen Vei Electronic's Net Debt?

As you can see below, at the end of September 2020, Jhen Vei Electronic had NT$90.2m of debt, up from NT$74.8m a year ago. Click the image for more detail. But it also has NT$101.5m in cash to offset that, meaning it has NT$11.3m net cash.

How Healthy Is Jhen Vei Electronic's Balance Sheet?

We can see from the most recent balance sheet that Jhen Vei Electronic had liabilities of NT$302.2m falling due within a year, and liabilities of NT$98.2m due beyond that. Offsetting this, it had NT$101.5m in cash and NT$409.8m in receivables that were due within 12 months. So it actually has NT$110.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Jhen Vei Electronic could probably pay off its debt with ease, as its balance sheet is far from stretched. 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.

In addition to that, we're happy to report that Jhen Vei Electronic has boosted its EBIT by 57%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jhen Vei Electronic 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Jhen Vei Electronic 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 two years, Jhen Vei Electronic burned a lot of cash. 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$11.3m, as well as more liquid assets than liabilities. And we liked the look of last year's 57% year-on-year EBIT growth. 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. Case in point: We've spotted 3 warning signs for Jhen Vei Electronic you should be aware of, and 1 of them can't be ignored.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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