We Think Nien Made Enterprise (TWSE:8464) Can Manage Its Debt With Ease

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Nien Made Enterprise Co., LTD. (TWSE:8464) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Nien Made Enterprise

What Is Nien Made Enterprise's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Nien Made Enterprise had debt of NT$851.9m, up from none in one year. 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?

We can see from the most recent balance sheet that Nien Made Enterprise had liabilities of NT$5.80b falling due within a year, and liabilities of NT$3.06b due beyond 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. Nien Made Enterprise 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 most recent three years, Nien Made Enterprise recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

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. The cherry on top was that in converted 76% of that EBIT to free cash flow, bringing in NT$5.2b. So we don't think Nien Made Enterprise's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Nien Made Enterprise has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.