These 4 Measures Indicate That Min Aik Precision Industrial (TWSE:4545) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Min Aik Precision Industrial Co., Ltd. (TWSE:4545) does carry debt. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Min Aik Precision Industrial

What Is Min Aik Precision Industrial's Net Debt?

The image below, which you can click on for greater detail, shows that Min Aik Precision Industrial had debt of NT$520.0m at the end of December 2023, a reduction from NT$664.0m over a year. However, its balance sheet shows it holds NT$913.5m in cash, so it actually has NT$393.5m net cash.

A Look At Min Aik Precision Industrial's Liabilities

Zooming in on the latest balance sheet data, we can see that Min Aik Precision Industrial had liabilities of NT$944.7m due within 12 months and liabilities of NT$256.4m due beyond that. Offsetting these obligations, it had cash of NT$913.5m as well as receivables valued at NT$393.5m due within 12 months. So it can boast NT$105.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Min Aik Precision Industrial could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Min Aik Precision Industrial boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Min Aik Precision Industrial's load is not too heavy, because its EBIT was down 48% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Min Aik Precision Industrial 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Min Aik Precision Industrial 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, Min Aik Precision Industrial actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Min Aik Precision Industrial has NT$393.5m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 106% of that EBIT to free cash flow, bringing in NT$503m. So we are not troubled with Min Aik Precision Industrial's debt use. 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. To that end, you should be aware of the 3 warning signs we've spotted with Min Aik Precision Industrial .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.