These 4 Measures Indicate That Makalot Industrial (TWSE:1477) Is Using Debt Safely

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Makalot Industrial Co., Ltd. (TWSE:1477) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Makalot Industrial

How Much Debt Does Makalot Industrial Carry?

As you can see below, Makalot Industrial had NT$1.40b of debt at March 2024, down from NT$1.94b a year prior. However, its balance sheet shows it holds NT$9.21b in cash, so it actually has NT$7.82b net cash.

A Look At Makalot Industrial's Liabilities

We can see from the most recent balance sheet that Makalot Industrial had liabilities of NT$12.1b falling due within a year, and liabilities of NT$357.5m due beyond that. Offsetting this, it had NT$9.21b in cash and NT$5.60b in receivables that were due within 12 months. So it can boast NT$2.39b more liquid assets than total liabilities.

This surplus suggests that Makalot Industrial has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Makalot Industrial boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Makalot Industrial has increased its EBIT by 9.7% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Makalot Industrial 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 company can only pay off debt with cold hard cash, not accounting profits. Makalot Industrial 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 three years, Makalot Industrial recorded free cash flow worth a fulsome 85% 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 Makalot Industrial has NT$7.82b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$5.1b, being 85% of its EBIT. So is Makalot Industrial'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. To that end, you should be aware of the 1 warning sign we've spotted with Makalot Industrial .

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.