We Think Acelon Chemicals & Fiber (TPE:1466) Has A Fair Chunk Of Debt

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.' 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. Importantly, Acelon Chemicals & Fiber Corporation (TPE:1466) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Acelon Chemicals & Fiber

How Much Debt Does Acelon Chemicals & Fiber Carry?

As you can see below, Acelon Chemicals & Fiber had NT$1.24b of debt at September 2020, down from NT$1.39b a year prior. However, it does have NT$236.4m in cash offsetting this, leading to net debt of about 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 its liabilities total NT$1.18b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of NT$1.88b, so it does suggest shareholders should keep an eye on Acelon Chemicals & Fiber's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. 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%. To be frank that doesn't bode well.

Caveat Emptor

While Acelon Chemicals & Fiber's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. 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. For example, we would not want to see a repeat of last year's loss of NT$83m. In the meantime, we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Acelon Chemicals & Fiber you should be aware of, and 1 of them makes us a bit uncomfortable.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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