Does Regal Holding (TPE:4807) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Regal Holding Co., Ltd. (TPE:4807) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Regal Holding

What Is Regal Holding's Net Debt?

The chart below, which you can click on for greater detail, shows that Regal Holding had NT$322.4m in debt in September 2020; about the same as the year before. However, its balance sheet shows it holds NT$327.4m in cash, so it actually has NT$4.93m net cash.

How Strong Is Regal Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Regal Holding had liabilities of NT$480.4m due within 12 months and liabilities of NT$66.2m due beyond that. Offsetting these obligations, it had cash of NT$327.4m as well as receivables valued at NT$520.8m due within 12 months. So it actually has NT$301.5m more liquid assets than total liabilities.

This surplus strongly suggests that Regal Holding has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Regal Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Regal Holding made a loss at the EBIT level, last year, it was also good to see that it generated NT$106m in EBIT over the last twelve months. 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 Regal Holding 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. Regal Holding 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 year, Regal Holding burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Regal Holding has NT$4.93m in net cash and a decent-looking balance sheet. So we are not troubled with Regal Holding's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Regal Holding is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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