Does Evertop Wire Cable (TPE:1616) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Evertop Wire Cable Corporation (TPE:1616) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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.

View our latest analysis for Evertop Wire Cable

How Much Debt Does Evertop Wire Cable Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Evertop Wire Cable had debt of NT$807.1m, up from NT$766.4m in one year. However, because it has a cash reserve of NT$186.6m, its net debt is less, at about NT$620.5m.

How Strong Is Evertop Wire Cable's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Evertop Wire Cable had liabilities of NT$1.11b due within 12 months and liabilities of NT$158.6m due beyond that. On the other hand, it had cash of NT$186.6m and NT$565.3m worth of receivables due within a year. So it has liabilities totalling NT$517.9m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Evertop Wire Cable has a market capitalization of NT$1.16b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Evertop Wire Cable'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, Evertop Wire Cable made a loss at the EBIT level, and saw its revenue drop to NT$2.7b, which is a fall of 15%. We would much prefer see growth.

Caveat Emptor

Not only did Evertop Wire Cable's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost NT$30m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through NT$92m of cash over the last year. So in short it's a really risky stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Evertop Wire Cable (of which 1 is a bit unpleasant!) you should know about.

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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