Excelsior Medical (TPE:4104) Could Easily Take On More Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Excelsior Medical Co., Ltd. (TPE:4104) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Excelsior Medical

What Is Excelsior Medical's Debt?

The image below, which you can click on for greater detail, shows that Excelsior Medical had debt of NT$411.3m at the end of September 2020, a reduction from NT$1.69b over a year. But it also has NT$3.13b in cash to offset that, meaning it has NT$2.72b net cash.

A Look At Excelsior Medical's Liabilities

Zooming in on the latest balance sheet data, we can see that Excelsior Medical had liabilities of NT$3.93b due within 12 months and liabilities of NT$387.1m due beyond that. Offsetting these obligations, it had cash of NT$3.13b as well as receivables valued at NT$4.06b due within 12 months. So it can boast NT$2.87b more liquid assets than total liabilities.

This excess liquidity is a great indication that Excelsior Medical's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Excelsior Medical boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Excelsior Medical has increased its EBIT by 7.5% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Excelsior Medical will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Excelsior Medical 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. Happily for any shareholders, Excelsior Medical actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Excelsior Medical has net cash of NT$2.72b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$1.2b, being 132% of its EBIT. So is Excelsior Medical's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 2 warning signs for Excelsior Medical you should be aware of.

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. 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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