Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Southeast Cement Co.,Ltd. (TPE:1110) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Southeast CementLtd
How Much Debt Does Southeast CementLtd Carry?
The image below, which you can click on for greater detail, shows that Southeast CementLtd had debt of NT$130.0m at the end of September 2020, a reduction from NT$230.0m over a year. But it also has NT$600.2m in cash to offset that, meaning it has NT$470.2m net cash.
How Healthy Is Southeast CementLtd's Balance Sheet?
The latest balance sheet data shows that Southeast CementLtd had liabilities of NT$530.8m due within a year, and liabilities of NT$605.2m falling due after that. On the other hand, it had cash of NT$600.2m and NT$348.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$187.8m.
Given Southeast CementLtd has a market capitalization of NT$9.20b, 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. Despite its noteworthy liabilities, Southeast CementLtd boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Southeast CementLtd'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.
Over 12 months, Southeast CementLtd made a loss at the EBIT level, and saw its revenue drop to NT$1.6b, which is a fall of 3.4%. That's not what we would hope to see.
So How Risky Is Southeast CementLtd?
Although Southeast CementLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of NT$374m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Southeast CementLtd you should know about.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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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About TWSE:1110
Excellent balance sheet with poor track record.
