Jess-link Products (TWSE:6197) Could Easily Take On More Debt

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 can see that Jess-link Products Co., Ltd. (TWSE:6197) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Jess-link Products

How Much Debt Does Jess-link Products Carry?

The image below, which you can click on for greater detail, shows that at December 2023 Jess-link Products had debt of NT$100.0m, up from none in one year. However, its balance sheet shows it holds NT$1.70b in cash, so it actually has NT$1.60b net cash.

How Strong Is Jess-link Products' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jess-link Products had liabilities of NT$1.59b due within 12 months and liabilities of NT$279.4m due beyond that. Offsetting this, it had NT$1.70b in cash and NT$1.45b in receivables that were due within 12 months. So it can boast NT$1.28b more liquid assets than total liabilities.

This surplus suggests that Jess-link Products has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 69% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Jess-link Products'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Jess-link Products 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, Jess-link Products actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jess-link Products has NT$1.60b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$559m, being 108% of its EBIT. So is Jess-link Products'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. For example Jess-link Products has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.