Health Check: How Prudently Does Grand Pacific Petrochemical (TWSE:1312) Use Debt?

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 note that Grand Pacific Petrochemical Corporation (TWSE:1312) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Grand Pacific Petrochemical

How Much Debt Does Grand Pacific Petrochemical Carry?

As you can see below, Grand Pacific Petrochemical had NT$19.4b of debt at September 2024, down from NT$20.8b a year prior. On the flip side, it has NT$5.91b in cash leading to net debt of about NT$13.5b.

How Strong Is Grand Pacific Petrochemical's Balance Sheet?

We can see from the most recent balance sheet that Grand Pacific Petrochemical had liabilities of NT$7.42b falling due within a year, and liabilities of NT$18.9b due beyond that. On the other hand, it had cash of NT$5.91b and NT$4.05b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$16.3b.

When you consider that this deficiency exceeds the company's NT$12.1b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Grand Pacific Petrochemical 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 Grand Pacific Petrochemical wasn't profitable at an EBIT level, but managed to grow its revenue by 2.7%, to NT$16b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Grand Pacific Petrochemical had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable NT$1.5b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of NT$4.5b over the last twelve months. That means it's on the risky side of things. 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. Case in point: We've spotted 1 warning sign for Grand Pacific Petrochemical you should be aware of.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.