These 4 Measures Indicate That Nien Made Enterprise (TPE:8464) Is Using Debt Safely

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Nien Made Enterprise Co., LTD. (TPE:8464) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Nien Made Enterprise

What Is Nien Made Enterprise's Net Debt?

As you can see below, at the end of September 2020, Nien Made Enterprise had NT$5.60b of debt, up from NT$2.21b a year ago. Click the image for more detail. However, it does have NT$10.1b in cash offsetting this, leading to net cash of NT$4.51b.

How Strong Is Nien Made Enterprise's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nien Made Enterprise had liabilities of NT$10.5b due within 12 months and liabilities of NT$2.03b due beyond that. Offsetting these obligations, it had cash of NT$10.1b as well as receivables valued at NT$3.21b due within 12 months. So it actually has NT$826.7m more liquid assets than total liabilities.

Having regard to Nien Made Enterprise's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the NT$94.1b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Nien Made Enterprise boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Nien Made Enterprise grew its EBIT by 14% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Nien Made Enterprise 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Nien Made Enterprise 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 most recent three years, Nien Made Enterprise recorded free cash flow worth 69% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Nien Made Enterprise has net cash of NT$4.51b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$4.7b, being 69% of its EBIT. So is Nien Made Enterprise's debt a risk? It doesn't seem so to us. 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. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Nien Made Enterprise you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

If you’re looking to trade Nien Made Enterprise, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide 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.