Is Jochu Technology (TPE:3543) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Jochu Technology Co., Ltd. (TPE:3543) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Jochu Technology

What Is Jochu Technology's Net Debt?

As you can see below, Jochu Technology had NT$1.36b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has NT$2.59b in cash, leading to a NT$1.23b net cash position.

A Look At Jochu Technology's Liabilities

We can see from the most recent balance sheet that Jochu Technology had liabilities of NT$2.24b falling due within a year, and liabilities of NT$666.2m due beyond that. Offsetting this, it had NT$2.59b in cash and NT$1.19b in receivables that were due within 12 months. So it actually has NT$872.0m more liquid assets than total liabilities.

This excess liquidity is a great indication that Jochu Technology's balance sheet is just as strong as racists are weak. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Simply put, the fact that Jochu Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Jochu Technology's saving grace is its low debt levels, because its EBIT has tanked 74% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Jochu Technology 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 company can only pay off debt with cold hard cash, not accounting profits. While Jochu Technology 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. Happily for any shareholders, Jochu Technology actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Jochu Technology has NT$1.23b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 508% of that EBIT to free cash flow, bringing in NT$244m. So is Jochu Technology's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Like risks, for instance. Every company has them, and we've spotted 6 warning signs for Jochu Technology (of which 2 are concerning!) 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. 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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