Is Oriental Union Chemical (TWSE:1710) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Oriental Union Chemical Corporation (TWSE:1710) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Oriental Union Chemical

What Is Oriental Union Chemical's Debt?

As you can see below, Oriental Union Chemical had NT$14.1b of debt at September 2024, down from NT$14.9b a year prior. On the flip side, it has NT$1.53b in cash leading to net debt of about NT$12.6b.

A Look At Oriental Union Chemical's Liabilities

Zooming in on the latest balance sheet data, we can see that Oriental Union Chemical had liabilities of NT$8.57b due within 12 months and liabilities of NT$8.99b due beyond that. Offsetting this, it had NT$1.53b in cash and NT$1.72b in receivables that were due within 12 months. So its liabilities total NT$14.3b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of NT$15.2b, so it does suggest shareholders should keep an eye on Oriental Union Chemical's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Oriental Union Chemical can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Oriental Union Chemical wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to NT$23b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Oriental Union Chemical had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost NT$73m 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled NT$960m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Oriental Union Chemical .

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. 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.