Shihlin Electric & Engineering (TWSE:1503) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Shihlin Electric & Engineering Corp. (TWSE:1503) does use debt in its business. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Shihlin Electric & Engineering

What Is Shihlin Electric & Engineering's Net Debt?

The image below, which you can click on for greater detail, shows that Shihlin Electric & Engineering had debt of NT$1.44b at the end of December 2023, a reduction from NT$3.22b over a year. However, its balance sheet shows it holds NT$3.37b in cash, so it actually has NT$1.93b net cash.

How Healthy Is Shihlin Electric & Engineering's Balance Sheet?

We can see from the most recent balance sheet that Shihlin Electric & Engineering had liabilities of NT$17.8b falling due within a year, and liabilities of NT$2.80b due beyond that. Offsetting this, it had NT$3.37b in cash and NT$9.34b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$7.89b.

Of course, Shihlin Electric & Engineering has a market capitalization of NT$152.1b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Shihlin Electric & Engineering also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that Shihlin Electric & Engineering has increased its EBIT by 9.3% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shihlin Electric & Engineering'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 Shihlin Electric & Engineering 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, Shihlin Electric & Engineering recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Shihlin Electric & Engineering has NT$1.93b in net cash. The cherry on top was that in converted 82% of that EBIT to free cash flow, bringing in NT$3.6b. So we don't think Shihlin Electric & Engineering's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Shihlin Electric & Engineering that you should be aware of before investing here.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.