Is Kaulin Mfg (TPE:1531) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Kaulin Mfg. Co., Ltd. (TPE:1531) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Kaulin Mfg

What Is Kaulin Mfg's Net Debt?

The chart below, which you can click on for greater detail, shows that Kaulin Mfg had NT$100.0m in debt in September 2020; about the same as the year before. However, its balance sheet shows it holds NT$1.21b in cash, so it actually has NT$1.11b net cash.

How Healthy Is Kaulin Mfg's Balance Sheet?

According to the last reported balance sheet, Kaulin Mfg had liabilities of NT$444.0m due within 12 months, and liabilities of NT$271.1m due beyond 12 months. On the other hand, it had cash of NT$1.21b and NT$736.3m worth of receivables due within a year. So it can boast NT$1.23b more liquid assets than total liabilities.

This surplus strongly suggests that Kaulin Mfg has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Kaulin Mfg boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Kaulin Mfg will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Kaulin Mfg made a loss at the EBIT level, and saw its revenue drop to NT$1.6b, which is a fall of 30%. To be frank that doesn't bode well.

So How Risky Is Kaulin Mfg?

While Kaulin Mfg lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow NT$209m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Kaulin Mfg has 2 warning signs (and 1 which is significant) we think you should know about.

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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