These 4 Measures Indicate That Shiny Chemical Industrial (TWSE:1773) Is Using Debt Reasonably Well

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.' 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. Importantly, Shiny Chemical Industrial Co., Ltd. (TWSE:1773) does carry debt. 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. If things get really bad, the lenders can take control of the business. 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.

See our latest analysis for Shiny Chemical Industrial

How Much Debt Does Shiny Chemical Industrial Carry?

As you can see below, Shiny Chemical Industrial had NT$2.96b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had NT$323.2m in cash, and so its net debt is NT$2.63b.

How Healthy Is Shiny Chemical Industrial's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shiny Chemical Industrial had liabilities of NT$3.40b due within 12 months and liabilities of NT$1.90b due beyond that. Offsetting these obligations, it had cash of NT$323.2m as well as receivables valued at NT$1.32b due within 12 months. So it has liabilities totalling NT$3.67b more than its cash and near-term receivables, combined.

Since publicly traded Shiny Chemical Industrial shares are worth a total of NT$38.6b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Shiny Chemical Industrial's net debt is only 1.1 times its EBITDA. And its EBIT easily covers its interest expense, being 130 times the size. So we're pretty relaxed about its super-conservative use of debt. On the other hand, Shiny Chemical Industrial saw its EBIT drop by 4.5% 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 it is Shiny Chemical Industrial'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. In the last three years, Shiny Chemical Industrial basically broke even on a free cash flow basis. While many companies do operate at break-even, we prefer see substantial free cash flow, especially if a it already has dead.

Our View

On our analysis Shiny Chemical Industrial's interest cover should signal that it won't have too much trouble with its debt. However, our other observations weren't so heartening. To be specific, it seems about as good at converting EBIT to free cash flow as wet socks are at keeping your feet warm. When we consider all the factors mentioned above, we do feel a bit cautious about Shiny Chemical Industrial's use of debt. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. 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. We've identified 1 warning sign with Shiny Chemical Industrial , and understanding them should be part of your investment process.

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.

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