Does Chung Hwa Chemical Industrial Works (TWSE:1727) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Chung Hwa Chemical Industrial Works, Ltd. (TWSE:1727) 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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Chung Hwa Chemical Industrial Works

What Is Chung Hwa Chemical Industrial Works's Debt?

The image below, which you can click on for greater detail, shows that Chung Hwa Chemical Industrial Works had debt of NT$509.5m at the end of March 2024, a reduction from NT$757.7m over a year. However, it also had NT$169.1m in cash, and so its net debt is NT$340.4m.

A Look At Chung Hwa Chemical Industrial Works' Liabilities

We can see from the most recent balance sheet that Chung Hwa Chemical Industrial Works had liabilities of NT$738.2m falling due within a year, and liabilities of NT$176.8m due beyond that. Offsetting these obligations, it had cash of NT$169.1m as well as receivables valued at NT$534.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$211.6m.

Given Chung Hwa Chemical Industrial Works has a market capitalization of NT$4.10b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Chung Hwa Chemical Industrial Works'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 Chung Hwa Chemical Industrial Works had a loss before interest and tax, and actually shrunk its revenue by 19%, to NT$1.7b. We would much prefer see growth.

Caveat Emptor

While Chung Hwa Chemical Industrial Works's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at NT$2.5m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled NT$152m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Chung Hwa Chemical Industrial Works (including 1 which is a bit unpleasant) .

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.

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