Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Jess-link Products Co., Ltd. (TPE:6197) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Jess-link Products
What Is Jess-link Products's Net Debt?
The image below, which you can click on for greater detail, shows that at December 2020 Jess-link Products had debt of NT$607.0m, up from NT$112.0m in one year. But on the other hand it also has NT$1.88b in cash, leading to a NT$1.28b net cash position.
How Healthy Is Jess-link Products' Balance Sheet?
We can see from the most recent balance sheet that Jess-link Products had liabilities of NT$1.54b falling due within a year, and liabilities of NT$138.3m due beyond that. Offsetting these obligations, it had cash of NT$1.88b as well as receivables valued at NT$1.09b due within 12 months. So it can boast NT$1.30b more liquid assets than total liabilities.
This excess liquidity suggests that Jess-link Products 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 Jess-link Products has more cash than debt is arguably a good indication that it can manage its debt safely.
On top of that, Jess-link Products grew its EBIT by 74% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jess-link Products 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. Jess-link Products 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. Over the last three years, Jess-link Products actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing up
While it is always sensible to investigate a company's debt, in this case Jess-link Products has NT$1.28b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 139% of that EBIT to free cash flow, bringing in NT$183m. The bottom line is that we do not find Jess-link Products's debt levels at all concerning. 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 2 warning signs for Jess-link Products you should be aware of, and 1 of them is potentially serious.
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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About TWSE:6197
Jess-link Products
Provides various electronic products and components in Taiwan, China, the United States, Japan, Thailand, and internationally.
Flawless balance sheet with solid track record.
