Makalot Industrial (TPE:1477) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Makalot Industrial Co., Ltd. (TPE:1477) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Makalot Industrial

What Is Makalot Industrial's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Makalot Industrial had NT$2.09b of debt, an increase on NT$940.8m, over one year. However, its balance sheet shows it holds NT$3.84b in cash, so it actually has NT$1.75b net cash.

How Strong Is Makalot Industrial's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Makalot Industrial had liabilities of NT$6.92b due within 12 months and liabilities of NT$386.3m due beyond that. Offsetting these obligations, it had cash of NT$3.84b as well as receivables valued at NT$3.59b due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Makalot Industrial's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the NT$54.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Makalot Industrial boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Makalot Industrial grew its EBIT by 10% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Makalot Industrial'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Makalot Industrial 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, Makalot Industrial produced sturdy free cash flow equating to 73% 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 Makalot Industrial has NT$1.75b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$2.4b, being 73% of its EBIT. So is Makalot Industrial's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 2 warning signs for Makalot Industrial you should be aware of.

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.

If you decide to trade Makalot Industrial, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.