Anderson Industrial (TPE:1528) Is Carrying A Fair Bit Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Anderson Industrial Corporation (TPE:1528) does use debt in its business. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Anderson Industrial

What Is Anderson Industrial's Debt?

As you can see below, at the end of September 2020, Anderson Industrial had NT$1.95b of debt, up from NT$1.86b a year ago. Click the image for more detail. On the flip side, it has NT$908.6m in cash leading to net debt of about NT$1.04b.

A Look At Anderson Industrial's Liabilities

We can see from the most recent balance sheet that Anderson Industrial had liabilities of NT$2.40b falling due within a year, and liabilities of NT$384.5m due beyond that. On the other hand, it had cash of NT$908.6m and NT$1.10b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$773.1m.

This deficit isn't so bad because Anderson Industrial is worth NT$1.91b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Anderson Industrial'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, Anderson Industrial made a loss at the EBIT level, and saw its revenue drop to NT$3.6b, which is a fall of 12%. That's not what we would hope to see.

Caveat Emptor

While Anderson Industrial's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at NT$176m. 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. Another cause for caution is that is bled NT$33m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Like risks, for instance. Every company has them, and we've spotted 2 warning signs for Anderson Industrial (of which 1 makes us a bit uncomfortable!) you should know about.

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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