Is C Sun Mfg (TWSE:2467) Using Too Much Debt?

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.' 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 C Sun Mfg Ltd. (TWSE:2467) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for C Sun Mfg

What Is C Sun Mfg's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 C Sun Mfg had NT$2.55b of debt, an increase on NT$2.19b, over one year. But it also has NT$3.24b in cash to offset that, meaning it has NT$691.0m net cash.

How Strong Is C Sun Mfg's Balance Sheet?

We can see from the most recent balance sheet that C Sun Mfg had liabilities of NT$3.74b falling due within a year, and liabilities of NT$1.46b due beyond that. Offsetting this, it had NT$3.24b in cash and NT$1.77b in receivables that were due within 12 months. So it has liabilities totalling NT$181.3m more than its cash and near-term receivables, combined.

This state of affairs indicates that C Sun Mfg's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the NT$31.9b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, C Sun Mfg boasts net cash, so it's fair to say it does not have a heavy debt load!

C Sun Mfg's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since C Sun Mfg 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While C Sun Mfg 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. Over the last three years, C Sun Mfg actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that C Sun Mfg has NT$691.0m in net cash. The cherry on top was that in converted 107% of that EBIT to free cash flow, bringing in NT$1.1b. So is C Sun Mfg'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. Case in point: We've spotted 1 warning sign for C Sun Mfg you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.