Here's Why Ji-Haw IndustrialLtd (TWSE:3011) Can Afford Some Debt

Warren Buffett famously said, '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. As with many other companies Ji-Haw Industrial Co.,Ltd. (TWSE:3011) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Ji-Haw IndustrialLtd

How Much Debt Does Ji-Haw IndustrialLtd Carry?

The image below, which you can click on for greater detail, shows that at December 2023 Ji-Haw IndustrialLtd had debt of NT$324.5m, up from NT$100.0m in one year. However, it does have NT$314.0m in cash offsetting this, leading to net debt of about NT$10.6m.

A Look At Ji-Haw IndustrialLtd's Liabilities

According to the last reported balance sheet, Ji-Haw IndustrialLtd had liabilities of NT$680.4m due within 12 months, and liabilities of NT$103.5m due beyond 12 months. Offsetting these obligations, it had cash of NT$314.0m as well as receivables valued at NT$396.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$73.0m.

Given Ji-Haw IndustrialLtd has a market capitalization of NT$3.40b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. But either way, Ji-Haw IndustrialLtd has virtually no net debt, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Ji-Haw IndustrialLtd 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.

Over 12 months, Ji-Haw IndustrialLtd made a loss at the EBIT level, and saw its revenue drop to NT$1.2b, which is a fall of 23%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Ji-Haw IndustrialLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost NT$156m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through NT$138m of cash over the last year. So to be blunt we think it is risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Ji-Haw IndustrialLtd's profit, revenue, and operating cashflow have changed over the last few years.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.