I-Sheng Electric Wire & Cable (TPE:6115) Seems To Use Debt Rather Sparingly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

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

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

You can click the graphic below for the historical numbers, but it shows that as of September 2020 I-Sheng Electric Wire & Cable had NT$1.96b of debt, an increase on NT$1.87b, over one year. However, it does have NT$3.52b in cash offsetting this, leading to net cash of NT$1.56b.

A Look At I-Sheng Electric Wire & Cable's Liabilities

We can see from the most recent balance sheet that I-Sheng Electric Wire & Cable had liabilities of NT$3.12b falling due within a year, 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. Succinctly put, I-Sheng Electric Wire & Cable boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, I-Sheng Electric Wire & Cable grew its EBIT by 23% 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. While I-Sheng Electric Wire & Cable 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. 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$1.56b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$958m, being 110% of its EBIT. When it comes to I-Sheng Electric Wire & Cable's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

If you’re looking to trade I-Sheng Electric Wire & Cable, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.