We Think Eclat Textile (TWSE:1476) Can Manage Its Debt With Ease

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. Importantly, Eclat Textile Co., Ltd. (TWSE:1476) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Eclat Textile

How Much Debt Does Eclat Textile Carry?

You can click the graphic below for the historical numbers, but it shows that Eclat Textile had NT$1.15b of debt in September 2024, down from NT$1.33b, one year before. But it also has NT$6.92b in cash to offset that, meaning it has NT$5.77b net cash.

How Healthy Is Eclat Textile's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Eclat Textile had liabilities of NT$6.47b due within 12 months and liabilities of NT$85.0m due beyond that. On the other hand, it had cash of NT$6.92b and NT$6.09b worth of receivables due within a year. So it actually has NT$6.45b more liquid assets than total liabilities.

This short term liquidity is a sign that Eclat Textile could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Eclat Textile has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Eclat Textile grew its EBIT by 35% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Eclat Textile's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Eclat Textile 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, Eclat Textile recorded free cash flow worth a fulsome 81% 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 Eclat Textile has NT$5.77b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in NT$5.1b. So is Eclat Textile'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. For example, we've discovered 1 warning sign for Eclat Textile that you should be aware of before investing here.

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.

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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.