We Think Shihlin Paper (TPE:1903) Has A Fair Chunk Of 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Shihlin Paper Corporation (TPE:1903) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Shihlin Paper

How Much Debt Does Shihlin Paper Carry?

As you can see below, at the end of September 2020, Shihlin Paper had NT$2.38b of debt, up from NT$2.19b a year ago. Click the image for more detail. On the flip side, it has NT$711.0m in cash leading to net debt of about NT$1.67b.

How Strong Is Shihlin Paper's Balance Sheet?

According to the last reported balance sheet, Shihlin Paper had liabilities of NT$2.48b due within 12 months, and liabilities of NT$1.61b due beyond 12 months. Offsetting these obligations, it had cash of NT$711.0m as well as receivables valued at NT$60.4m due within 12 months. So its liabilities total NT$3.32b more than the combination of its cash and short-term receivables.

Shihlin Paper has a market capitalization of NT$12.8b, so it could very likely raise cash to ameliorate 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 Shihlin Paper'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.

In the last year Shihlin Paper had a loss before interest and tax, and actually shrunk its revenue by 19%, to NT$160m. That's not what we would hope to see.

Caveat Emptor

Not only did Shihlin Paper's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost NT$166m 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. Another cause for caution is that is bled NT$131m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. For instance, we've identified 1 warning sign for Shihlin Paper that you should be aware of.

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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