Is Chicony Power Technology (TWSE:6412) A Risky Investment?

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 note that Chicony Power Technology Co., Ltd. (TWSE:6412) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Chicony Power Technology

How Much Debt Does Chicony Power Technology Carry?

The image below, which you can click on for greater detail, shows that Chicony Power Technology had debt of NT$1.09b at the end of March 2024, a reduction from NT$2.07b over a year. But it also has NT$4.44b in cash to offset that, meaning it has NT$3.35b net cash.

How Strong Is Chicony Power Technology's Balance Sheet?

According to the last reported balance sheet, Chicony Power Technology had liabilities of NT$16.9b due within 12 months, and liabilities of NT$214.3m due beyond 12 months. On the other hand, it had cash of NT$4.44b and NT$10.5b worth of receivables due within a year. So it has liabilities totalling NT$2.10b more than its cash and near-term receivables, combined.

Given Chicony Power Technology has a market capitalization of NT$55.9b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Chicony Power Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Chicony Power Technology has increased its EBIT by 7.6% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Chicony Power Technology can strengthen its balance sheet over time. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Chicony Power Technology 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. Over the most recent three years, Chicony Power Technology recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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$3.35b. The cherry on top was that in converted 68% of that EBIT to free cash flow, bringing in NT$3.8b. So is Chicony Power Technology'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 1 warning sign for Chicony Power Technology that you should be aware of before investing here.

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.