Is Rexon IndustrialLtd (TPE:1515) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Rexon Industrial Corp.,Ltd (TPE:1515) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Rexon IndustrialLtd

What Is Rexon IndustrialLtd's Debt?

The image below, which you can click on for greater detail, shows that Rexon IndustrialLtd had debt of NT$593.1m at the end of September 2020, a reduction from NT$1.20b over a year. But on the other hand it also has NT$1.53b in cash, leading to a NT$933.2m net cash position.

How Healthy Is Rexon IndustrialLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Rexon IndustrialLtd had liabilities of NT$4.28b due within 12 months and liabilities of NT$371.3m due beyond that. Offsetting this, it had NT$1.53b in cash and NT$2.44b in receivables that were due within 12 months. So its liabilities total NT$686.7m more than the combination of its cash and short-term receivables.

Given Rexon IndustrialLtd has a market capitalization of NT$13.4b, 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. Despite its noteworthy liabilities, Rexon IndustrialLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Rexon IndustrialLtd grew its EBIT by 9.6% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Rexon IndustrialLtd'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Rexon IndustrialLtd 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. Over the last three years, Rexon IndustrialLtd actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Rexon IndustrialLtd has NT$933.2m in net cash. And it impressed us with free cash flow of NT$1.3b, being 123% of its EBIT. So is Rexon IndustrialLtd's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Rexon IndustrialLtd, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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