Chicony Power Technology (TWSE:6412) Has A Rock Solid 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.' 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 Chicony Power Technology Co., Ltd. (TWSE:6412) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Chicony Power Technology

What Is Chicony Power Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that Chicony Power Technology had NT$818.4m of debt in June 2024, down from NT$2.07b, one year before. However, it does have NT$3.43b in cash offsetting this, leading to net cash of NT$2.61b.

How Strong Is Chicony Power Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Chicony Power Technology had liabilities of NT$15.8b due within 12 months and liabilities of NT$213.7m due beyond that. On the other hand, it had cash of NT$3.43b and NT$11.8b worth of receivables due within a year. So it has liabilities totalling NT$721.4m more than its cash and near-term receivables, combined.

This state of affairs indicates that Chicony Power Technology'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$50.9b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Chicony Power Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, Chicony Power Technology grew its EBIT by 5.8% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Chicony Power Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Chicony Power Technology 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 most recent three years, Chicony Power Technology recorded free cash flow worth 72% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Chicony Power Technology's liabilities, but we can be reassured by the fact it has has net cash of NT$2.61b. And it impressed us with free cash flow of NT$1.9b, being 72% of its EBIT. So is Chicony Power Technology's debt a risk? It doesn't seem so to us. 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. We've identified 1 warning sign with Chicony Power Technology , and understanding them should be part of your investment process.

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.