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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that China Electric Mfg. Corporation (TPE:1611) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for China Electric Mfg
What Is China Electric Mfg's Debt?
The image below, which you can click on for greater detail, shows that China Electric Mfg had debt of NT$701.0m at the end of September 2020, a reduction from NT$1.21b over a year. But it also has NT$1.55b in cash to offset that, meaning it has NT$845.1m net cash.
A Look At China Electric Mfg's Liabilities
Zooming in on the latest balance sheet data, we can see that China Electric Mfg had liabilities of NT$1.20b due within 12 months and liabilities of NT$741.9m due beyond that. Offsetting this, it had NT$1.55b in cash and NT$348.2m in receivables that were due within 12 months. So it has liabilities totalling NT$44.0m more than its cash and near-term receivables, combined.
Having regard to China Electric Mfg's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the NT$3.86b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, China Electric Mfg boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since China Electric 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.
In the last year China Electric Mfg had a loss before interest and tax, and actually shrunk its revenue by 6.5%, to NT$2.2b. That's not what we would hope to see.
So How Risky Is China Electric Mfg?
While China Electric Mfg lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of NT$806m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. Case in point: We've spotted 2 warning signs for China Electric Mfg you should be aware of.
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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About TWSE:1611
China Electric Mfg
Manufactures and sells electrical appliances, lighting products, and related accessories in Taiwan.
Flawless balance sheet with acceptable track record.