Bonny Worldwide (TWSE:8467) Could Easily Take On More Debt

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. We can see that Bonny Worldwide Limited (TWSE:8467) does use debt in its business. 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Bonny Worldwide

What Is Bonny Worldwide's Debt?

You can click the graphic below for the historical numbers, but it shows that Bonny Worldwide had NT$900.8m of debt in March 2024, down from NT$1.23b, one year before. But it also has NT$970.4m in cash to offset that, meaning it has NT$69.6m net cash.

How Healthy Is Bonny Worldwide's Balance Sheet?

According to the last reported balance sheet, Bonny Worldwide had liabilities of NT$1.07b due within 12 months, and liabilities of NT$212.9m due beyond 12 months. Offsetting this, it had NT$970.4m in cash and NT$400.1m in receivables that were due within 12 months. So it actually has NT$88.7m more liquid assets than total liabilities.

Having regard to Bonny Worldwide's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the NT$9.55b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Bonny Worldwide boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Bonny Worldwide has been able to increase its EBIT by 24% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Bonny Worldwide'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 company can only pay off debt with cold hard cash, not accounting profits. Bonny Worldwide 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, Bonny Worldwide recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 Bonny Worldwide has NT$69.6m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$521m, being 77% of its EBIT. So we don't think Bonny Worldwide's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Bonny Worldwide (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com