Is Min Aik Precision Industrial (TPE:4545) Using Too Much Debt?

Warren Buffett famously said, '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 Min Aik Precision Industrial Co., Ltd. (TPE:4545) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Min Aik Precision Industrial

What Is Min Aik Precision Industrial's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Min Aik Precision Industrial had NT$748.0m of debt, an increase on NT$628.0m, over one year. However, it does have NT$972.2m in cash offsetting this, leading to net cash of NT$224.2m.

How Healthy Is Min Aik Precision Industrial's Balance Sheet?

The latest balance sheet data shows that Min Aik Precision Industrial had liabilities of NT$967.7m due within a year, and liabilities of NT$541.2m falling due after that. On the other hand, it had cash of NT$972.2m and NT$429.9m worth of receivables due within a year. So it has liabilities totalling NT$106.8m more than its cash and near-term receivables, combined.

Given Min Aik Precision Industrial has a market capitalization of NT$2.32b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Min Aik Precision Industrial boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Min Aik Precision Industrial has increased its EBIT by 3.5% 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 Min Aik Precision Industrial 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Min Aik Precision Industrial 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 two years, Min Aik Precision Industrial recorded free cash flow worth a fulsome 84% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

We could understand if investors are concerned about Min Aik Precision Industrial's liabilities, but we can be reassured by the fact it has has net cash of NT$224.2m. And it impressed us with free cash flow of -NT$61m, being 84% of its EBIT. So is Min Aik Precision Industrial's debt a risk? It doesn't seem so to us. 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. Like risks, for instance. Every company has them, and we've spotted 5 warning signs for Min Aik Precision Industrial (of which 2 are significant!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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