NANTEX Industry (TPE:2108) Seems To Use Debt Rather Sparingly

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.' 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 can see that NANTEX Industry Co., Ltd. (TPE:2108) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for NANTEX Industry

What Is NANTEX Industry's Debt?

The image below, which you can click on for greater detail, shows that NANTEX Industry had debt of NT$140.0m at the end of September 2020, a reduction from NT$200.0m over a year. But it also has NT$4.94b in cash to offset that, meaning it has NT$4.80b net cash.

How Strong Is NANTEX Industry's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that NANTEX Industry had liabilities of NT$1.62b due within 12 months and liabilities of NT$455.8m due beyond that. On the other hand, it had cash of NT$4.94b and NT$1.51b worth of receivables due within a year. So it actually has NT$4.37b more liquid assets than total liabilities.

This short term liquidity is a sign that NANTEX Industry could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that NANTEX Industry has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that NANTEX Industry has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since NANTEX Industry 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While NANTEX Industry has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, NANTEX Industry generated free cash flow amounting to a very robust 90% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case NANTEX Industry has NT$4.80b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$2.2b, being 90% of its EBIT. So we don't think NANTEX Industry's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for NANTEX Industry that you should be aware of before investing here.

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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