Pou Chen (TPE:9904) Is Making Moderate Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Pou Chen Corporation (TPE:9904) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Pou Chen

How Much Debt Does Pou Chen Carry?

The image below, which you can click on for greater detail, shows that Pou Chen had debt of NT$100.0b at the end of December 2020, a reduction from NT$105.7b over a year. On the flip side, it has NT$60.1b in cash leading to net debt of about NT$40.0b.

How Strong Is Pou Chen's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Pou Chen had liabilities of NT$85.4b due within 12 months and liabilities of NT$82.3b due beyond that. Offsetting these obligations, it had cash of NT$60.1b as well as receivables valued at NT$37.2b due within 12 months. So its liabilities total NT$70.4b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of NT$97.7b, so it does suggest shareholders should keep an eye on Pou Chen's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Pou Chen's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Pou Chen had a loss before interest and tax, and actually shrunk its revenue by 20%, to NT$250b. To be frank that doesn't bode well.

Caveat Emptor

While Pou Chen's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at NT$2.1b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Surprisingly, we note that it actually reported positive free cash flow of NT$12b and a profit of NT$4.8b. So one might argue that there's still a chance it can get things on the right track. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Pou Chen you should know about.

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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