Is Carnival Industrial (TPE:1417) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Carnival Industrial Corporation (TPE:1417) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Carnival Industrial

What Is Carnival Industrial's Debt?

You can click the graphic below for the historical numbers, but it shows that Carnival Industrial had NT$114.0m of debt in September 2020, down from NT$200.0m, one year before. However, it does have NT$1.11b in cash offsetting this, leading to net cash of NT$998.7m.

A Look At Carnival Industrial's Liabilities

We can see from the most recent balance sheet that Carnival Industrial had liabilities of NT$434.0m falling due within a year, and liabilities of NT$145.1m due beyond that. Offsetting these obligations, it had cash of NT$1.11b as well as receivables valued at NT$115.3m due within 12 months. So it actually has NT$648.9m more liquid assets than total liabilities.

This excess liquidity is a great indication that Carnival Industrial's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Carnival Industrial boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Carnival Industrial will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Carnival Industrial had a loss before interest and tax, and actually shrunk its revenue by 17%, to NT$1.2b. We would much prefer see growth.

So How Risky Is Carnival Industrial?

While Carnival Industrial lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of NT$106m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. To that end, you should be aware of the 3 warning signs we've spotted with Carnival Industrial .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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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