Nien Made Enterprise (TWSE:8464) Could Easily Take On More Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Nien Made Enterprise Co., LTD. (TWSE:8464) does carry debt. But is this debt a concern to shareholders?

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. 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. 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 Nien Made Enterprise

What Is Nien Made Enterprise's Net Debt?

As you can see below, at the end of September 2024, Nien Made Enterprise had NT$851.9m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds NT$13.1b in cash, so it actually has NT$12.2b net cash.

How Strong Is Nien Made Enterprise's Balance Sheet?

The latest balance sheet data shows that Nien Made Enterprise had liabilities of NT$5.80b due within a year, and liabilities of NT$3.06b falling due after that. Offsetting this, it had NT$13.1b in cash and NT$3.24b in receivables that were due within 12 months. So it can boast NT$7.47b more liquid assets than total liabilities.

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

Also positive, Nien Made Enterprise grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. During the last three years, Nien Made Enterprise produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Nien Made Enterprise has NT$12.2b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$5.2b, being 76% of its EBIT. So is Nien Made Enterprise's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Nien Made Enterprise's earnings per share history for free.

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.