These 4 Measures Indicate That Jess-link Products (TWSE:6197) Is Using Debt Safely

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.' 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. Importantly, Jess-link Products Co., Ltd. (TWSE:6197) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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

How Much Debt Does Jess-link Products Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Jess-link Products had debt of NT$508.0m, up from NT$265.0m in one year. But it also has NT$2.03b in cash to offset that, meaning it has NT$1.53b net cash.

A Look At Jess-link Products' Liabilities

We can see from the most recent balance sheet that Jess-link Products had liabilities of NT$2.45b falling due within a year, and liabilities of NT$164.9m due beyond that. On the other hand, it had cash of NT$2.03b and NT$1.79b worth of receivables due within a year. So it actually has NT$1.21b 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. Succinctly put, Jess-link Products boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Jess-link Products grew its EBIT by 150% 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 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. Over the most recent three years, Jess-link Products recorded free cash flow worth 79% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jess-link Products has NT$1.53b in net cash and a decent-looking balance sheet. And we liked the look of last year's 150% year-on-year EBIT growth. So is Jess-link Products's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Jess-link Products that you should be aware of.

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.