We Think Chiu Ting Machinery (TWSE:1539) Can Manage Its Debt With Ease

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 can see that Chiu Ting Machinery Co., Ltd. (TWSE:1539) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Chiu Ting Machinery

What Is Chiu Ting Machinery's Net Debt?

As you can see below, Chiu Ting Machinery had NT$381.4m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has NT$527.3m in cash, leading to a NT$145.9m net cash position.

A Look At Chiu Ting Machinery's Liabilities

The latest balance sheet data shows that Chiu Ting Machinery had liabilities of NT$403.9m due within a year, and liabilities of NT$279.0m falling due after that. Offsetting these obligations, it had cash of NT$527.3m as well as receivables valued at NT$176.6m due within 12 months. So it actually has NT$20.9m more liquid assets than total liabilities.

Having regard to Chiu Ting Machinery's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the NT$1.63b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Chiu Ting Machinery has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Chiu Ting Machinery has boosted its EBIT by 65%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Chiu Ting Machinery will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Chiu Ting Machinery 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. Over the last three years, Chiu Ting Machinery actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Chiu Ting Machinery has NT$145.9m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$136m, being 187% of its EBIT. So is Chiu Ting Machinery'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. Be aware that Chiu Ting Machinery is showing 2 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.