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. Importantly, Ji-Haw Industrial Co.,Ltd. (TWSE:3011) does carry debt. But the real question is whether this debt is making the company risky.
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Ji-Haw IndustrialLtd
As you can see below, at the end of June 2024, Ji-Haw IndustrialLtd had NT$461.6m of debt, up from NT$100.0m a year ago. Click the image for more detail. However, it also had NT$349.5m in cash, and so its net debt is NT$112.1m.
We can see from the most recent balance sheet that Ji-Haw IndustrialLtd had liabilities of NT$749.6m falling due within a year, and liabilities of NT$247.6m due beyond that. On the other hand, it had cash of NT$349.5m and NT$389.4m worth of receivables due within a year. So it has liabilities totalling NT$258.4m more than its cash and near-term receivables, combined.
Given Ji-Haw IndustrialLtd has a market capitalization of NT$3.51b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 Ji-Haw IndustrialLtd 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.
Over 12 months, Ji-Haw IndustrialLtd made a loss at the EBIT level, and saw its revenue drop to NT$1.1b, which is a fall of 10%. That's not what we would hope to see.
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). To be specific the EBIT loss came in at NT$196m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through NT$223m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Ji-Haw IndustrialLtd has 1 warning sign we think you should be aware of.
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.