Hey-Song (TPE:1234) Has A Rock Solid Balance Sheet

Warren Buffett famously said, '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 can see that Hey-Song Corporation (TPE:1234) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Hey-Song

What Is Hey-Song's Debt?

As you can see below, Hey-Song had NT$850.0m of debt at December 2020, down from NT$1.40b a year prior. However, it does have NT$1.45b in cash offsetting this, leading to net cash of NT$603.5m.

A Look At Hey-Song's Liabilities

The latest balance sheet data shows that Hey-Song had liabilities of NT$1.74b due within a year, and liabilities of NT$2.40b falling due after that. On the other hand, it had cash of NT$1.45b and NT$744.8m worth of receivables due within a year. So it has liabilities totalling NT$1.94b more than its cash and near-term receivables, combined.

Given Hey-Song has a market capitalization of NT$14.3b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Hey-Song also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Hey-Song has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is Hey-Song'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Hey-Song 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, Hey-Song actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Hey-Song does have more liabilities than liquid assets, it also has net cash of NT$603.5m. And it impressed us with free cash flow of NT$1.2b, being 191% of its EBIT. So we don't think Hey-Song's use of debt is risky. 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 Hey-Song has 2 warning signs (and 1 which doesn't sit too well with us) we think 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. 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.
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