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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Jess-link Products Co., Ltd. (TWSE:6197) does carry debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

View 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 June 2024 Jess-link Products had debt of NT$75.0m, up from none in one year. However, it does have NT$1.90b in cash offsetting this, leading to net cash of NT$1.83b.

How Healthy 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$2.60b due within 12 months and liabilities of NT$174.8m due beyond that. On the other hand, it had cash of NT$1.90b and NT$1.79b worth of receivables due within a year. So it actually has NT$919.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Jess-link Products could probably pay off its debt with ease, as its balance sheet is far from stretched. 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.

Even more impressive was the fact that Jess-link Products grew its EBIT by 154% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 Jess-link Products 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 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. Over the most recent three years, Jess-link Products recorded free cash flow worth 75% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jess-link Products has NT$1.83b in net cash and a decent-looking balance sheet. And we liked the look of last year's 154% year-on-year EBIT growth. 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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Jess-link Products (1 doesn't sit too well with us!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.