Does Ocean Plastics (TWSE:1321) Have A Healthy Balance Sheet?

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. Importantly, Ocean Plastics Co., Ltd. (TWSE:1321) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

See our latest analysis for Ocean Plastics

How Much Debt Does Ocean Plastics Carry?

As you can see below, Ocean Plastics had NT$4.00b of debt at September 2024, down from NT$4.24b a year prior. However, it also had NT$1.12b in cash, and so its net debt is NT$2.88b.

How Healthy Is Ocean Plastics' Balance Sheet?

We can see from the most recent balance sheet that Ocean Plastics had liabilities of NT$1.24b falling due within a year, and liabilities of NT$4.57b due beyond that. Offsetting these obligations, it had cash of NT$1.12b as well as receivables valued at NT$546.5m due within 12 months. So its liabilities total NT$4.13b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Ocean Plastics has a market capitalization of NT$7.99b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ocean Plastics'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 Ocean Plastics had a loss before interest and tax, and actually shrunk its revenue by 3.1%, to NT$4.8b. We would much prefer see growth.

Caveat Emptor

Importantly, Ocean Plastics had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost NT$17m 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. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of NT$209m and the profit of NT$158m. So one might argue that there's still a chance it can get things on the right track. 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. For instance, we've identified 3 warning signs for Ocean Plastics (2 are a bit unpleasant) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.