Acelon Chemicals & Fiber (TPE:1466) Is Making Moderate Use Of Debt

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. We can see that Acelon Chemicals & Fiber Corporation (TPE:1466) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 Acelon Chemicals & Fiber

What Is Acelon Chemicals & Fiber's Debt?

The image below, which you can click on for greater detail, shows that Acelon Chemicals & Fiber had debt of NT$1.24b at the end of September 2020, a reduction from NT$1.39b over a year. However, it also had NT$236.4m in cash, and so its net debt is NT$1.00b.

A Look At Acelon Chemicals & Fiber's Liabilities

According to the last reported balance sheet, Acelon Chemicals & Fiber had liabilities of NT$559.1m due within 12 months, and liabilities of NT$1.24b due beyond 12 months. Offsetting these obligations, it had cash of NT$236.4m as well as receivables valued at NT$387.3m due within 12 months. So it has liabilities totalling NT$1.18b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of NT$1.81b, so it does suggest shareholders should keep an eye on Acelon Chemicals & Fiber's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Acelon Chemicals & Fiber's earnings that will influence how the balance sheet holds up in the future. 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, Acelon Chemicals & Fiber made a loss at the EBIT level, and saw its revenue drop to NT$2.5b, which is a fall of 28%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Acelon Chemicals & Fiber's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at NT$63m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of NT$83m into a profit. In the meantime, we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. 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 3 warning signs for Acelon Chemicals & Fiber (of which 1 is significant!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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