C Sun Mfg (TPE:2467) Seems To Use Debt Rather Sparingly

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 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 note that C Sun Mfg Ltd. (TPE:2467) does have debt on its balance sheet. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for C Sun Mfg

What Is C Sun Mfg's Debt?

The image below, which you can click on for greater detail, shows that C Sun Mfg had debt of NT$1.27b at the end of September 2020, a reduction from NT$1.97b over a year. But on the other hand it also has NT$1.42b in cash, leading to a NT$146.9m net cash position.

How Strong Is C Sun Mfg's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that C Sun Mfg had liabilities of NT$2.88b due within 12 months and liabilities of NT$818.4m due beyond that. Offsetting these obligations, it had cash of NT$1.42b as well as receivables valued at NT$1.84b due within 12 months. So its liabilities total NT$442.2m more than the combination of its cash and short-term receivables.

Of course, C Sun Mfg has a market capitalization of NT$6.34b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, C Sun Mfg also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that C Sun Mfg has increased its EBIT by 5.2% over twelve months, which should ease any concerns about debt repayment. 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 C Sun Mfg 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While C Sun Mfg has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, C Sun Mfg actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

We could understand if investors are concerned about C Sun Mfg's liabilities, but we can be reassured by the fact it has has net cash of NT$146.9m. The cherry on top was that in converted 131% of that EBIT to free cash flow, bringing in NT$1.4b. So we don't think C Sun Mfg's use of debt is risky. 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. We've identified 3 warning signs with C Sun Mfg , and understanding them should be part of your investment process.

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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