Is Hong Ho Precision TextileLtd (TWSE:1446) Using Too Much Debt?

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 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 Hong Ho Precision Textile Co.,Ltd. (TWSE:1446) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Hong Ho Precision TextileLtd

What Is Hong Ho Precision TextileLtd's Debt?

As you can see below, Hong Ho Precision TextileLtd had NT$200.0m of debt at September 2024, down from NT$3.25b a year prior. But it also has NT$778.0m in cash to offset that, meaning it has NT$578.0m net cash.

How Healthy Is Hong Ho Precision TextileLtd's Balance Sheet?

According to the last reported balance sheet, Hong Ho Precision TextileLtd had liabilities of NT$969.5m due within 12 months, and liabilities of NT$18.3m due beyond 12 months. Offsetting this, it had NT$778.0m in cash and NT$8.93m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$200.9m.

Of course, Hong Ho Precision TextileLtd has a market capitalization of NT$5.33b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Hong Ho Precision TextileLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Hong Ho Precision TextileLtd made a loss at the EBIT level, last year, it was also good to see that it generated NT$1.5b in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hong Ho Precision TextileLtd's earnings that will influence how the balance sheet holds up in the future. 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. Hong Ho Precision TextileLtd 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. Over the last year, Hong Ho Precision TextileLtd actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Hong Ho Precision TextileLtd has NT$578.0m in net cash. The cherry on top was that in converted 244% of that EBIT to free cash flow, bringing in NT$3.6b. So is Hong Ho Precision TextileLtd'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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Hong Ho Precision TextileLtd 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.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.