Ji-Haw IndustrialLtd (TPE:3011) Has Debt But No Earnings; Should You Worry?

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 Ji-Haw Industrial Co.,Ltd. (TPE:3011) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Ji-Haw IndustrialLtd

What Is Ji-Haw IndustrialLtd's Net Debt?

The chart below, which you can click on for greater detail, shows that Ji-Haw IndustrialLtd had NT$140.0m in debt in September 2020; about the same as the year before. However, its balance sheet shows it holds NT$306.3m in cash, so it actually has NT$166.3m net cash.

A Look At Ji-Haw IndustrialLtd's Liabilities

The latest balance sheet data shows that Ji-Haw IndustrialLtd had liabilities of NT$685.0m due within a year, and liabilities of NT$111.6m falling due after that. Offsetting this, it had NT$306.3m in cash and NT$513.3m in receivables that were due within 12 months. So it can boast NT$23.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Ji-Haw IndustrialLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Ji-Haw IndustrialLtd boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Ji-Haw IndustrialLtd'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.

In the last year Ji-Haw IndustrialLtd had a loss before interest and tax, and actually shrunk its revenue by 8.1%, to NT$1.3b. That's not what we would hope to see.

So How Risky Is Ji-Haw IndustrialLtd?

While Ji-Haw IndustrialLtd lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow NT$36m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Ji-Haw IndustrialLtd you should be aware of.

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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