Is Kaulin Mfg (TWSE:1531) Using Debt In A Risky Way?

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 Kaulin Mfg. Co., Ltd. (TWSE:1531) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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 Kaulin Mfg

How Much Debt Does Kaulin Mfg Carry?

As you can see below, Kaulin Mfg had NT$100.0m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have NT$1.19b in cash offsetting this, leading to net cash of NT$1.09b.

A Look At Kaulin Mfg's Liabilities

The latest balance sheet data shows that Kaulin Mfg had liabilities of NT$474.3m due within a year, and liabilities of NT$225.6m falling due after that. Offsetting these obligations, it had cash of NT$1.19b as well as receivables valued at NT$741.1m due within 12 months. So it actually has NT$1.23b more liquid assets than total liabilities.

This surplus strongly suggests that Kaulin Mfg has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Kaulin Mfg boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Kaulin Mfg will need earnings to service that debt. 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, Kaulin Mfg made a loss at the EBIT level, and saw its revenue drop to NT$1.5b, which is a fall of 11%. We would much prefer see growth.

So How Risky Is Kaulin Mfg?

Although Kaulin Mfg had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of NT$27m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. For instance, we've identified 1 warning sign for Kaulin Mfg that you should be aware of.

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. 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.