We Think Bonny Worldwide (TWSE:8467) Can Stay On Top Of Its Debt

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.' 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. As with many other companies Bonny Worldwide Limited (TWSE:8467) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Bonny Worldwide

How Much Debt Does Bonny Worldwide Carry?

As you can see below, Bonny Worldwide had NT$980.8m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have NT$1.01b in cash offsetting this, leading to net cash of NT$31.5m.

How Healthy Is Bonny Worldwide's Balance Sheet?

According to the last reported balance sheet, Bonny Worldwide had liabilities of NT$1.28b due within 12 months, and liabilities of NT$137.0m due beyond 12 months. Offsetting this, it had NT$1.01b in cash and NT$735.5m in receivables that were due within 12 months. So it can boast NT$332.2m more liquid assets than total liabilities.

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

On the other hand, Bonny Worldwide's EBIT dived 12%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 last three years, Bonny Worldwide reported free cash flow worth 8.4% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Bonny Worldwide has net cash of NT$31.5m, as well as more liquid assets than liabilities. So we don't have any problem with Bonny Worldwide's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Bonny Worldwide has 2 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.