Here's Why President Chain Store (TWSE:2912) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that President Chain Store Corporation (TWSE:2912) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 President Chain Store

How Much Debt Does President Chain Store Carry?

The image below, which you can click on for greater detail, shows that at September 2024 President Chain Store had debt of NT$30.2b, up from NT$19.6b in one year. But on the other hand it also has NT$57.5b in cash, leading to a NT$27.3b net cash position.

How Strong Is President Chain Store's Balance Sheet?

According to the last reported balance sheet, President Chain Store had liabilities of NT$113.9b due within 12 months, and liabilities of NT$106.7b due beyond 12 months. Offsetting these obligations, it had cash of NT$57.5b as well as receivables valued at NT$11.6b due within 12 months. So it has liabilities totalling NT$151.5b more than its cash and near-term receivables, combined.

This deficit isn't so bad because President Chain Store is worth NT$280.7b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, President Chain Store boasts net cash, so it's fair to say it does not have a heavy debt load!

While President Chain Store doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if President Chain Store 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 President Chain Store 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. Over the last three years, President Chain Store actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While President Chain Store does have more liabilities than liquid assets, it also has net cash of NT$27.3b. The cherry on top was that in converted 201% of that EBIT to free cash flow, bringing in NT$23b. So we are not troubled with President Chain Store's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for President Chain Store that you should be aware of before investing here.

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.