Would Anderson Industrial (TWSE:1528) Be Better Off With Less Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Anderson Industrial Corporation (TWSE:1528) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Anderson Industrial

What Is Anderson Industrial's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Anderson Industrial had debt of NT$2.36b, up from NT$2.13b in one year. However, because it has a cash reserve of NT$1.06b, its net debt is less, at about NT$1.30b.

How Healthy Is Anderson Industrial's Balance Sheet?

According to the last reported balance sheet, Anderson Industrial had liabilities of NT$2.78b due within 12 months, and liabilities of NT$500.5m due beyond 12 months. Offsetting these obligations, it had cash of NT$1.06b as well as receivables valued at NT$1.03b due within 12 months. So it has liabilities totalling NT$1.19b more than its cash and near-term receivables, combined.

Anderson Industrial has a market capitalization of NT$2.99b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Anderson Industrial'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.

Over 12 months, Anderson Industrial made a loss at the EBIT level, and saw its revenue drop to NT$3.8b, which is a fall of 3.5%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Anderson Industrial produced an earnings before interest and tax (EBIT) loss. Indeed, it lost NT$192m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of NT$170m. So we do think this stock is quite risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Anderson Industrial (of which 2 are potentially serious!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.