Is Oriental Union Chemical (TPE:1710) Using Too Much 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 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. We can see that Oriental Union Chemical Corporation (TPE:1710) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Oriental Union Chemical

What Is Oriental Union Chemical's Net Debt?

As you can see below, at the end of September 2020, Oriental Union Chemical had NT$17.1b of debt, up from NT$14.9b a year ago. Click the image for more detail. However, it also had NT$3.93b in cash, and so its net debt is NT$13.2b.

A Look At Oriental Union Chemical's Liabilities

We can see from the most recent balance sheet that Oriental Union Chemical had liabilities of NT$10.7b falling due within a year, and liabilities of NT$10.4b due beyond that. Offsetting this, it had NT$3.93b in cash and NT$1.53b in receivables that were due within 12 months. So its liabilities total NT$15.6b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's NT$15.3b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Oriental Union Chemical 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.

In the last year Oriental Union Chemical had a loss before interest and tax, and actually shrunk its revenue by 33%, to NT$18b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Oriental Union Chemical's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at NT$818m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of NT$632m. And until that time we think this is a risky stock. 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. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Oriental Union Chemical you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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