Eclat Textile (TPE:1476) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Eclat Textile Co., Ltd. (TPE:1476) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Eclat Textile

What Is Eclat Textile's Debt?

As you can see below, at the end of December 2020, Eclat Textile had NT$1.92b of debt, up from NT$1.57b a year ago. Click the image for more detail. But on the other hand it also has NT$4.03b in cash, leading to a NT$2.10b net cash position.

How Healthy Is Eclat Textile's Balance Sheet?

We can see from the most recent balance sheet that Eclat Textile had liabilities of NT$6.63b falling due within a year, and liabilities of NT$650.9m due beyond that. Offsetting these obligations, it had cash of NT$4.03b as well as receivables valued at NT$5.37b due within 12 months. So it actually has NT$2.11b more liquid assets than total liabilities.

Having regard to Eclat Textile's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the NT$135.8b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Eclat Textile boasts net cash, so it's fair to say it does not have a heavy debt load!

Eclat Textile's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Eclat Textile can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Eclat Textile may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Eclat Textile produced sturdy free cash flow equating to 70% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Eclat Textile has net cash of NT$2.10b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$3.0b, being 70% of its EBIT. So is Eclat Textile's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Eclat Textile you should know about.

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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