We Think C Sun Mfg (TPE:2467) Can Manage Its Debt With Ease

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.' 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 C Sun Mfg Ltd. (TPE:2467) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View 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. However, its balance sheet shows it holds NT$1.42b in cash, so it actually has NT$146.9m net cash.

A Look At C Sun Mfg's Liabilities

The latest balance sheet data shows that C Sun Mfg had liabilities of NT$2.88b due within a year, and liabilities of NT$818.4m falling due after that. Offsetting this, it had NT$1.42b in cash and NT$1.84b in receivables that were due within 12 months. So its liabilities total NT$442.2m more than the combination of its cash and short-term receivables.

Since publicly traded C Sun Mfg shares are worth a total of NT$5.16b, it seems unlikely that this level of liabilities would be a major threat. 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.

Fortunately, C Sun Mfg grew its EBIT by 5.2% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is C Sun Mfg'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. C Sun Mfg may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, C Sun Mfg actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that C Sun Mfg has NT$146.9m in net cash. And it impressed us with free cash flow of NT$1.4b, being 131% of its EBIT. So we don't think C Sun Mfg's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with C Sun Mfg .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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