These 4 Measures Indicate That Champion Building MaterialsLtd (TWSE:1806) Is Using Debt Reasonably Well

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.' 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 Champion Building Materials Co.,Ltd. (TWSE:1806) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Champion Building MaterialsLtd

What Is Champion Building MaterialsLtd's Net Debt?

The chart below, which you can click on for greater detail, shows that Champion Building MaterialsLtd had NT$1.47b in debt in March 2024; about the same as the year before. However, its balance sheet shows it holds NT$1.97b in cash, so it actually has NT$499.0m net cash.

How Strong Is Champion Building MaterialsLtd's Balance Sheet?

The latest balance sheet data shows that Champion Building MaterialsLtd had liabilities of NT$2.30b due within a year, and liabilities of NT$323.8m falling due after that. Offsetting these obligations, it had cash of NT$1.97b as well as receivables valued at NT$845.1m due within 12 months. So it actually has NT$192.2m more liquid assets than total liabilities.

This surplus suggests that Champion Building MaterialsLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Champion Building MaterialsLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Champion Building MaterialsLtd grew its EBIT by 32% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Champion Building MaterialsLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Champion Building MaterialsLtd 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. Looking at the most recent three years, Champion Building MaterialsLtd recorded free cash flow of 26% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Champion Building MaterialsLtd has net cash of NT$499.0m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 32% over the last year. So is Champion Building MaterialsLtd's debt a risk? It doesn't seem so to us. Even though Champion Building MaterialsLtd lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check out how earnings have been trending over the last few years.

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.

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