Is Daxin Materials (TPE:5234) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Daxin Materials Corporation (TPE:5234) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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 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 Daxin Materials

What Is Daxin Materials's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Daxin Materials had NT$159.2m of debt, an increase on NT$50.0m, over one year. However, it does have NT$1.24b in cash offsetting this, leading to net cash of NT$1.08b.

A Look At Daxin Materials' Liabilities

We can see from the most recent balance sheet that Daxin Materials had liabilities of NT$1.11b falling due within a year, and liabilities of NT$343.4m due beyond that. Offsetting this, it had NT$1.24b in cash and NT$1.23b in receivables that were due within 12 months. So it can boast NT$1.02b more liquid assets than total liabilities.

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

On the other hand, Daxin Materials saw its EBIT drop by 2.6% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Daxin Materials 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Daxin Materials 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. Over the last three years, Daxin Materials recorded free cash flow worth a fulsome 87% of its EBIT, which is stronger than we'd usually 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 Daxin Materials has NT$1.08b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$786m, being 87% of its EBIT. So we don't think Daxin Materials's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Daxin Materials that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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