Does Zeng Hsing Industrial (TPE:1558) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Zeng Hsing Industrial Co., Ltd. (TPE:1558) does use debt in its business. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Zeng Hsing Industrial

What Is Zeng Hsing Industrial's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Zeng Hsing Industrial had NT$1.17b of debt, an increase on NT$390.0m, over one year. However, its balance sheet shows it holds NT$2.78b in cash, so it actually has NT$1.61b net cash.

A Look At Zeng Hsing Industrial's Liabilities

Zooming in on the latest balance sheet data, we can see that Zeng Hsing Industrial had liabilities of NT$2.30b due within 12 months and liabilities of NT$611.9m due beyond that. On the other hand, it had cash of NT$2.78b and NT$1.63b worth of receivables due within a year. So it actually has NT$1.50b more liquid assets than total liabilities.

It's good to see that Zeng Hsing Industrial has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Zeng Hsing Industrial has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Zeng Hsing Industrial grew its EBIT by 15% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Zeng Hsing Industrial will need earnings to service that debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Zeng Hsing 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. Over the last three years, Zeng Hsing Industrial recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Zeng Hsing Industrial has NT$1.61b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 86% of that EBIT to free cash flow, bringing in NT$512m. So is Zeng Hsing Industrial's debt a risk? It doesn't seem so to us. 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. Like risks, for instance. Every company has them, and we've spotted 2 warning signs for Zeng Hsing Industrial (of which 1 can't be ignored!) you should know about.

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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