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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Carnival Industrial Corporation (TPE:1417) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Carnival Industrial

How Much Debt Does Carnival Industrial Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Carnival Industrial had debt of NT$115.0m, up from none in one year. But it also has NT$1.12b in cash to offset that, meaning it has NT$1.00b net cash.

How Healthy Is Carnival Industrial's Balance Sheet?

We can see from the most recent balance sheet that Carnival Industrial had liabilities of NT$435.4m falling due within a year, and liabilities of NT$153.1m due beyond that. On the other hand, it had cash of NT$1.12b and NT$106.3m worth of receivables due within a year. So it actually has NT$636.6m more liquid assets than total liabilities.

This excess liquidity suggests that Carnival Industrial is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. 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.

Over 12 months, Carnival Industrial made a loss at the EBIT level, and saw its revenue drop to NT$1.0b, which is a fall of 24%. To be frank that doesn't bode well.

So How Risky Is Carnival Industrial?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Carnival Industrial lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of NT$49m and booked a NT$266m accounting loss. With only NT$1.00b on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Carnival Industrial you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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