Does Chang-Ho Fibre (TPE:1468) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Chang-Ho Fibre Corporation (TPE:1468) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Chang-Ho Fibre

What Is Chang-Ho Fibre's Net Debt?

The chart below, which you can click on for greater detail, shows that Chang-Ho Fibre had NT$973.5m in debt in September 2020; about the same as the year before. However, because it has a cash reserve of NT$501.0m, its net debt is less, at about NT$472.5m.

How Strong Is Chang-Ho Fibre's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Chang-Ho Fibre had liabilities of NT$737.3m due within 12 months and liabilities of NT$675.6m due beyond that. Offsetting these obligations, it had cash of NT$501.0m as well as receivables valued at NT$52.4m due within 12 months. So it has liabilities totalling NT$859.5m more than its cash and near-term receivables, combined.

Chang-Ho Fibre has a market capitalization of NT$2.28b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is Chang-Ho Fibre'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.

In the last year Chang-Ho Fibre had a loss before interest and tax, and actually shrunk its revenue by 3.5%, to NT$965m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Chang-Ho Fibre produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at NT$70m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of NT$15m and the profit of NT$48m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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. For example, we've discovered 2 warning signs for Chang-Ho Fibre (1 can't be ignored!) that you should be aware of before investing here.

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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