These 4 Measures Indicate That Chia Ta World (TWSE:2033) Is Using Debt Reasonably Well

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. As with many other companies Chia Ta World Co., Ltd. (TWSE:2033) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Chia Ta World

How Much Debt Does Chia Ta World Carry?

As you can see below, at the end of September 2024, Chia Ta World had NT$155.0m of debt, up from NT$145.3m a year ago. Click the image for more detail. However, it does have NT$101.9m in cash offsetting this, leading to net debt of about NT$53.2m.

A Look At Chia Ta World's Liabilities

According to the last reported balance sheet, Chia Ta World had liabilities of NT$197.7m due within 12 months, and liabilities of NT$16.3m due beyond 12 months. Offsetting these obligations, it had cash of NT$101.9m as well as receivables valued at NT$150.5m due within 12 months. So it actually has NT$38.3m more liquid assets than total liabilities.

Having regard to Chia Ta World's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the NT$2.05b company is short on cash, but still worth keeping an eye on the balance sheet.

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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Chia Ta World's net debt to EBITDA ratio of about 1.5 suggests only moderate use of debt. And its strong interest cover of 18.0 times, makes us even more comfortable. Although Chia Ta World made a loss at the EBIT level, last year, it was also good to see that it generated NT$16m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Chia Ta World's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Happily for any shareholders, Chia Ta World actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

Happily, Chia Ta World's impressive interest cover implies it has the upper hand on its debt. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. Looking at the bigger picture, we think Chia Ta World's use of debt seems quite reasonable and we're not concerned about it. While debt does bring risk, when used wisely it can also bring a higher return on equity. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Chia Ta World (1 is a bit concerning!) that you should be aware of before investing here.

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.