Is Chia Hsin Cement (TPE:1103) Using Too Much 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Chia Hsin Cement Corporation (TPE:1103) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 Chia Hsin Cement

What Is Chia Hsin Cement's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Chia Hsin Cement had debt of NT$10.2b, up from NT$8.64b in one year. However, it also had NT$9.65b in cash, and so its net debt is NT$518.2m.

A Look At Chia Hsin Cement's Liabilities

The latest balance sheet data shows that Chia Hsin Cement had liabilities of NT$2.78b due within a year, and liabilities of NT$11.8b falling due after that. On the other hand, it had cash of NT$9.65b and NT$328.8m worth of receivables due within a year. So its liabilities total NT$4.63b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Chia Hsin Cement is worth NT$11.9b, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Chia Hsin Cement's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Chia Hsin Cement wasn't profitable at an EBIT level, but managed to grow its revenue by 2.2%, to NT$2.0b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Chia Hsin Cement produced an earnings before interest and tax (EBIT) loss. Indeed, it lost NT$704m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through NT$1.9b of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Chia Hsin Cement (including 1 which shouldn't be ignored) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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