Is Chia Her Industrial (TPE:1449) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Chia Her Industrial Co., Ltd. (TPE:1449) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Chia Her Industrial

How Much Debt Does Chia Her Industrial Carry?

You can click the graphic below for the historical numbers, but it shows that Chia Her Industrial had NT$3.42b of debt in December 2020, down from NT$3.63b, one year before. However, it also had NT$217.5m in cash, and so its net debt is NT$3.21b.

How Strong Is Chia Her Industrial's Balance Sheet?

The latest balance sheet data shows that Chia Her Industrial had liabilities of NT$2.60b due within a year, and liabilities of NT$2.68b falling due after that. On the other hand, it had cash of NT$217.5m and NT$278.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$4.78b.

This deficit casts a shadow over the NT$1.91b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Chia Her Industrial would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Chia Her 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 Chia Her Industrial had a loss before interest and tax, and actually shrunk its revenue by 23%, to NT$1.9b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Chia Her Industrial's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping NT$269m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized NT$459m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Chia Her Industrial (including 2 which are potentially serious) .

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. 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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