We Think Ace Pillar (TPE:8374) Can Manage Its Debt With Ease

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.' 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. Importantly, Ace Pillar Co., Ltd. (TPE:8374) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Ace Pillar

What Is Ace Pillar's Debt?

As you can see below, Ace Pillar had NT$184.3m of debt at September 2020, down from NT$418.5m a year prior. But on the other hand it also has NT$807.7m in cash, leading to a NT$623.5m net cash position.

How Strong Is Ace Pillar's Balance Sheet?

According to the last reported balance sheet, Ace Pillar had liabilities of NT$697.8m due within 12 months, and liabilities of NT$64.0m due beyond 12 months. Offsetting these obligations, it had cash of NT$807.7m as well as receivables valued at NT$867.9m due within 12 months. So it actually has NT$913.8m more liquid assets than total liabilities.

This surplus liquidity suggests that Ace Pillar's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Ace Pillar boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Ace Pillar improved its EBIT from a last year's loss to a positive NT$40m. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Ace Pillar 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. Happily for any shareholders, Ace Pillar actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Ace Pillar has net cash of NT$623.5m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$174m, being 438% of its EBIT. So is Ace Pillar's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Ace Pillar , and understanding them should be part of your investment process.

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.

If you’re looking to trade Ace Pillar, 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.