These 4 Measures Indicate That NANTEX Industry (TPE:2108) Is Using Debt Safely

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, NANTEX Industry Co., Ltd. (TPE:2108) does carry debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for NANTEX Industry

How Much Debt Does NANTEX Industry Carry?

The image below, which you can click on for greater detail, shows that at December 2020 NANTEX Industry had debt of NT$227.5m, up from NT$200.0m in one year. However, it does have NT$6.62b in cash offsetting this, leading to net cash of NT$6.39b.

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$2.68b due within 12 months and liabilities of NT$439.3m due beyond that. Offsetting these obligations, it had cash of NT$6.62b as well as receivables valued at NT$2.49b due within 12 months. So it can boast NT$5.98b more liquid assets than total liabilities.

This surplus suggests that NANTEX Industry has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that NANTEX Industry has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that NANTEX Industry grew its EBIT by 144% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. 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. NANTEX Industry may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, NANTEX Industry produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that NANTEX Industry has net cash of NT$6.39b, as well as more liquid assets than liabilities. And we liked the look of last year's 144% year-on-year EBIT growth. So is NANTEX Industry's debt a risk? It doesn't seem so to us. 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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