Is Hold-Key Electric Wire & Cable (TWSE:1618) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Hold-Key Electric Wire & Cable Co., Ltd (TWSE:1618) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. 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.

See our latest analysis for Hold-Key Electric Wire & Cable

What Is Hold-Key Electric Wire & Cable's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Hold-Key Electric Wire & Cable had debt of NT$587.4m, up from NT$369.7m in one year. However, its balance sheet shows it holds NT$749.8m in cash, so it actually has NT$162.4m net cash.

A Look At Hold-Key Electric Wire & Cable's Liabilities

We can see from the most recent balance sheet that Hold-Key Electric Wire & Cable had liabilities of NT$1.47b falling due within a year, and liabilities of NT$47.5m due beyond that. Offsetting these obligations, it had cash of NT$749.8m as well as receivables valued at NT$604.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$159.0m.

Having regard to Hold-Key Electric Wire & Cable's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the NT$8.59b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Hold-Key Electric Wire & Cable 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 Hold-Key Electric Wire & Cable has boosted its EBIT by 95%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hold-Key Electric Wire & Cable 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Hold-Key Electric Wire & Cable 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. During the last three years, Hold-Key Electric Wire & Cable burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Hold-Key Electric Wire & Cable has NT$162.4m in net cash. And it impressed us with its EBIT growth of 95% over the last year. So we are not troubled with Hold-Key Electric Wire & Cable's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Hold-Key Electric Wire & Cable has 1 warning sign we think 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.