Does China GlazeLtd (TPE:1809) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that China Glaze Co.,Ltd. (TPE:1809) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 China GlazeLtd

How Much Debt Does China GlazeLtd Carry?

The image below, which you can click on for greater detail, shows that China GlazeLtd had debt of NT$466.5m at the end of September 2020, a reduction from NT$516.9m over a year. However, it does have NT$1.07b in cash offsetting this, leading to net cash of NT$607.7m.

How Healthy Is China GlazeLtd's Balance Sheet?

According to the last reported balance sheet, China GlazeLtd had liabilities of NT$692.2m due within 12 months, and liabilities of NT$177.3m due beyond 12 months. Offsetting these obligations, it had cash of NT$1.07b as well as receivables valued at NT$548.4m due within 12 months. So it actually has NT$753.1m more liquid assets than total liabilities.

This surplus strongly suggests that China GlazeLtd has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that China GlazeLtd has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since China GlazeLtd will need earnings to service that debt. 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.

In the last year China GlazeLtd had a loss before interest and tax, and actually shrunk its revenue by 17%, to NT$1.9b. That's not what we would hope to see.

So How Risky Is China GlazeLtd?

Although China GlazeLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of NT$138m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with China GlazeLtd (including 1 which is significant) .

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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