We Think Shihlin Electric & Engineering (TWSE:1503) Can Manage Its Debt With Ease

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Shihlin Electric & Engineering Corp. (TWSE:1503) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Shihlin Electric & Engineering

How Much Debt Does Shihlin Electric & Engineering Carry?

The image below, which you can click on for greater detail, shows that Shihlin Electric & Engineering had debt of NT$926.8m at the end of September 2024, a reduction from NT$1.88b over a year. However, its balance sheet shows it holds NT$3.07b in cash, so it actually has NT$2.15b net cash.

A Look At Shihlin Electric & Engineering's Liabilities

According to the last reported balance sheet, Shihlin Electric & Engineering had liabilities of NT$16.6b due within 12 months, and liabilities of NT$2.72b due beyond 12 months. On the other hand, it had cash of NT$3.07b and NT$8.94b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$7.32b.

Since publicly traded Shihlin Electric & Engineering shares are worth a total of NT$92.7b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Shihlin Electric & Engineering boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Shihlin Electric & Engineering has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Shihlin Electric & Engineering can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. During the last three years, Shihlin Electric & Engineering produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Shihlin Electric & Engineering's liabilities, but we can be reassured by the fact it has has net cash of NT$2.15b. And it impressed us with its EBIT growth of 33% over the last year. So we don't think Shihlin Electric & Engineering's use of debt is risky. 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 Shihlin Electric & Engineering's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.