Does Ace Pillar (TPE:8374) Have A Healthy Balance Sheet?

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.' 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 Ace Pillar Co., Ltd. (TPE:8374) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Ace Pillar

What Is Ace Pillar's Debt?

You can click the graphic below for the historical numbers, but it shows that Ace Pillar had NT$98.9m of debt in December 2020, down from NT$322.1m, one year before. But on the other hand it also has NT$876.5m in cash, leading to a NT$777.6m net cash position.

A Look At Ace Pillar's Liabilities

According to the last reported balance sheet, Ace Pillar had liabilities of NT$714.3m due within 12 months, and liabilities of NT$75.3m due beyond 12 months. On the other hand, it had cash of NT$876.5m and NT$914.1m worth of receivables due within a year. So it actually has NT$1.00b more liquid assets than total liabilities.

This surplus strongly suggests that Ace Pillar has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Ace Pillar boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Ace Pillar made a loss at the EBIT level, last year, it was also good to see that it generated NT$125m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ace Pillar's earnings that will influence how the balance sheet holds up in the future. 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. While Ace Pillar 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 year, Ace Pillar recorded free cash flow worth a fulsome 83% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Ace Pillar has NT$777.6m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$104m, being 83% of its EBIT. So is Ace Pillar's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Ace Pillar's earnings per share history for free.

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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