We Think Cheng Shin Rubber Ind (TWSE:2105) Can Manage Its Debt With Ease

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Cheng Shin Rubber Ind. Co., Ltd. (TWSE:2105) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Cheng Shin Rubber Ind

How Much Debt Does Cheng Shin Rubber Ind Carry?

You can click the graphic below for the historical numbers, but it shows that Cheng Shin Rubber Ind had NT$34.6b of debt in March 2024, down from NT$40.4b, one year before. However, because it has a cash reserve of NT$27.0b, its net debt is less, at about NT$7.61b.

How Healthy Is Cheng Shin Rubber Ind's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cheng Shin Rubber Ind had liabilities of NT$26.5b due within 12 months and liabilities of NT$32.8b due beyond that. Offsetting these obligations, it had cash of NT$27.0b as well as receivables valued at NT$14.6b due within 12 months. So its liabilities total NT$17.7b more than the combination of its cash and short-term receivables.

Given Cheng Shin Rubber Ind has a market capitalization of NT$151.7b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Cheng Shin Rubber Ind's net debt is only 0.36 times its EBITDA. And its EBIT covers its interest expense a whopping 43.4 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On top of that, Cheng Shin Rubber Ind grew its EBIT by 48% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Cheng Shin Rubber Ind's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Happily for any shareholders, Cheng Shin Rubber Ind actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

Happily, Cheng Shin Rubber Ind's impressive interest cover implies it has the upper hand on its debt. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! It looks Cheng Shin Rubber Ind has no trouble standing on its own two feet, and it has no reason to fear its lenders. To our minds it has a healthy happy balance sheet. 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 - Cheng Shin Rubber Ind 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com