We Think President Chain Store (TWSE:2912) Can Stay On Top Of Its Debt

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.' 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. Importantly, President Chain Store Corporation (TWSE:2912) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View 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 March 2024 President Chain Store had debt of NT$20.8b, up from NT$10.6b in one year. But it also has NT$60.4b in cash to offset that, meaning it has NT$39.6b net cash.

A Look At President Chain Store's Liabilities

According to the last reported balance sheet, President Chain Store had liabilities of NT$106.4b due within 12 months, and liabilities of NT$103.0b due beyond 12 months. Offsetting this, it had NT$60.4b in cash and NT$10.8b in receivables that were due within 12 months. So its liabilities total NT$138.2b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because President Chain Store is worth NT$285.4b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, President Chain Store also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that President Chain Store grew its EBIT by 10% last year, making its debt load easier to handle. 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. Happily for any shareholders, President Chain Store actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While President Chain Store does have more liabilities than liquid assets, it also has net cash of NT$39.6b. The cherry on top was that in converted 214% of that EBIT to free cash flow, bringing in NT$36b. So we don't think President Chain Store's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for President Chain Store you should know about.

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.

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