Does Sunonwealth Electric Machine Industry (TWSE:2421) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Sunonwealth Electric Machine Industry Co., Ltd. (TWSE:2421) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Sunonwealth Electric Machine Industry

What Is Sunonwealth Electric Machine Industry's Debt?

The image below, which you can click on for greater detail, shows that Sunonwealth Electric Machine Industry had debt of NT$853.3m at the end of December 2023, a reduction from NT$1.69b over a year. But on the other hand it also has NT$4.25b in cash, leading to a NT$3.39b net cash position.

How Healthy Is Sunonwealth Electric Machine Industry's Balance Sheet?

The latest balance sheet data shows that Sunonwealth Electric Machine Industry had liabilities of NT$4.72b due within a year, and liabilities of NT$675.3m falling due after that. Offsetting these obligations, it had cash of NT$4.25b as well as receivables valued at NT$3.19b due within 12 months. So it actually has NT$2.04b more liquid assets than total liabilities.

This short term liquidity is a sign that Sunonwealth Electric Machine Industry could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Sunonwealth Electric Machine Industry boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Sunonwealth Electric Machine Industry grew its EBIT by 36% 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 future earnings, more than anything, that will determine Sunonwealth Electric Machine Industry's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Sunonwealth Electric Machine Industry 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. Happily for any shareholders, Sunonwealth Electric Machine Industry actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Sunonwealth Electric Machine Industry has net cash of NT$3.39b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$1.9b, being 107% of its EBIT. So is Sunonwealth Electric Machine Industry'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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Sunonwealth Electric Machine Industry that you should be aware of before investing here.

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.