We Think Eclat Textile (TPE:1476) Can Stay On Top Of Its Debt

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. Importantly, Eclat Textile Co., Ltd. (TPE:1476) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Eclat Textile

How Much Debt Does Eclat Textile Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Eclat Textile had debt of NT$2.44b, up from NT$1.62b in one year. However, it does have NT$4.02b in cash offsetting this, leading to net cash of NT$1.58b.

A Look At Eclat Textile's Liabilities

We can see from the most recent balance sheet that Eclat Textile had liabilities of NT$6.32b falling due within a year, and liabilities of NT$664.8m due beyond that. Offsetting this, it had NT$4.02b in cash and NT$4.00b in receivables that were due within 12 months. So it can boast NT$1.04b 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$115.9b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Eclat Textile has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Eclat Textile's EBIT dived 11%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Eclat Textile's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Eclat Textile has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Eclat Textile produced sturdy free cash flow equating to 51% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Eclat Textile has NT$1.58b in net cash and a decent-looking balance sheet. So we are not troubled with Eclat Textile's debt use. 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 be aware of the 1 warning sign we've spotted with Eclat Textile .

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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