We Think Evertop Wire Cable (TPE:1616) Has A Fair Chunk Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Evertop Wire Cable Corporation (TPE:1616) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Evertop Wire Cable

What Is Evertop Wire Cable's Net Debt?

As you can see below, Evertop Wire Cable had NT$679.2m of debt at September 2020, down from NT$1.13b a year prior. However, it also had NT$162.4m in cash, and so its net debt is NT$516.8m.

How Healthy 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$992.7m due within 12 months and liabilities of NT$144.5m due beyond that. Offsetting this, it had NT$162.4m in cash and NT$353.6m in receivables that were due within 12 months. So it has liabilities totalling NT$621.3m 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$1.20b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 Evertop Wire Cable will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Evertop Wire Cable's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Evertop Wire Cable produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at NT$56m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of NT$20m. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Evertop Wire Cable (1 is significant!) that you should be aware of before investing here.

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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