Does I-Sheng Electric Wire & Cable (TPE:6115) 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.' 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 I-Sheng Electric Wire & Cable Co., Ltd. (TPE:6115) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for I-Sheng Electric Wire & Cable

How Much Debt Does I-Sheng Electric Wire & Cable Carry?

As you can see below, at the end of September 2020, I-Sheng Electric Wire & Cable had NT$2.05b of debt, up from NT$1.87b a year ago. Click the image for more detail. But on the other hand it also has NT$3.52b in cash, leading to a NT$1.47b net cash position.

How Healthy Is I-Sheng Electric Wire & Cable's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that I-Sheng Electric Wire & Cable had liabilities of NT$3.12b due within 12 months and liabilities of NT$409.6m due beyond that. On the other hand, it had cash of NT$3.52b and NT$2.07b worth of receivables due within a year. So it actually has NT$2.06b more liquid assets than total liabilities.

This excess liquidity suggests that I-Sheng Electric Wire & Cable is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that I-Sheng Electric Wire & Cable has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, I-Sheng Electric Wire & Cable grew its EBIT by 20% in the last year, and that should make it easier to pay down debt, going forward. 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 I-Sheng Electric 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. I-Sheng Electric Wire & Cable 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, I-Sheng Electric Wire & Cable 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 investigate a company's debt, in this case I-Sheng Electric Wire & Cable has NT$1.47b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$958m, being 111% of its EBIT. So we don't think I-Sheng Electric Wire & Cable's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for I-Sheng Electric Wire & Cable (1 makes us a bit uncomfortable) you should be aware of.

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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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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