Is Right Way IndustrialLtd (TPE:1506) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Right Way Industrial Co.,Ltd (TPE:1506) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Right Way IndustrialLtd

How Much Debt Does Right Way IndustrialLtd Carry?

The image below, which you can click on for greater detail, shows that Right Way IndustrialLtd had debt of NT$923.8m at the end of September 2020, a reduction from NT$1.21b over a year. However, it does have NT$170.3m in cash offsetting this, leading to net debt of about NT$753.4m.

A Look At Right Way IndustrialLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Right Way IndustrialLtd had liabilities of NT$835.2m due within 12 months and liabilities of NT$535.5m due beyond that. Offsetting this, it had NT$170.3m in cash and NT$203.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$996.8m.

This deficit isn't so bad because Right Way IndustrialLtd is worth NT$1.79b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Right Way IndustrialLtd'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.

Over 12 months, Right Way IndustrialLtd made a loss at the EBIT level, and saw its revenue drop to NT$889m, which is a fall of 27%. That makes us nervous, to say the least.

Caveat Emptor

While Right Way IndustrialLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable NT$271m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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$66m of cash over the last year. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Right Way IndustrialLtd (1 is a bit unpleasant) you should be aware of.

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.

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This article by Simply Wall St is general in nature. 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.
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