Does Chicony Power Technology (TPE:6412) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Chicony Power Technology Co., Ltd. (TPE:6412) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Chicony Power Technology

How Much Debt Does Chicony Power Technology Carry?

The image below, which you can click on for greater detail, shows that Chicony Power Technology had debt of NT$138.2m at the end of December 2020, a reduction from NT$350.0m over a year. But it also has NT$1.58b in cash to offset that, meaning it has NT$1.44b net cash.

A Look At Chicony Power Technology's Liabilities

The latest balance sheet data shows that Chicony Power Technology had liabilities of NT$15.3b due within a year, and liabilities of NT$292.6m falling due after that. Offsetting this, it had NT$1.58b in cash and NT$9.77b in receivables that were due within 12 months. So its liabilities total NT$4.29b more than the combination of its cash and short-term receivables.

Since publicly traded Chicony Power Technology shares are worth a total of NT$29.6b, 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. Despite its noteworthy liabilities, Chicony Power Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Chicony Power Technology grew its EBIT by 28% 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 it is future earnings, more than anything, that will determine Chicony Power Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Chicony Power Technology 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. In the last three years, Chicony Power Technology's free cash flow amounted to 42% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While Chicony Power Technology does have more liabilities than liquid assets, it also has net cash of NT$1.44b. And it impressed us with its EBIT growth of 28% over the last year. So is Chicony Power Technology's debt a risk? It doesn't seem so to us. 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. Be aware that Chicony Power Technology is showing 2 warning signs in our investment analysis , you should know about...

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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