Is Iron Force Industrial (TPE:2228) Using Too Much Debt?

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, Iron Force Industrial Co., Ltd. (TPE:2228) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. 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 Iron Force Industrial

What Is Iron Force Industrial's Net Debt?

As you can see below, at the end of September 2020, Iron Force Industrial had NT$775.8m of debt, up from NT$447.7m a year ago. Click the image for more detail. But on the other hand it also has NT$1.48b in cash, leading to a NT$707.6m net cash position.

A Look At Iron Force Industrial's Liabilities

The latest balance sheet data shows that Iron Force Industrial had liabilities of NT$978.6m due within a year, and liabilities of NT$765.0m falling due after that. Offsetting this, it had NT$1.48b in cash and NT$808.9m in receivables that were due within 12 months. So it can boast NT$548.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Iron Force Industrial could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Iron Force Industrial has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Iron Force Industrial if management cannot prevent a repeat of the 84% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Iron Force Industrial's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Iron Force Industrial may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Iron Force Industrial recorded free cash flow worth 57% 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 we empathize with investors who find debt concerning, you should keep in mind that Iron Force Industrial has net cash of NT$707.6m, as well as more liquid assets than liabilities. So we don't have any problem with Iron Force Industrial's use of debt. 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 Iron Force Industrial (1 can't be ignored!) 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. 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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