Is Swancor Holding (TWSE:3708) Using Too Much Debt?

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, Swancor Holding Co., LTD. (TWSE:3708) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out our latest analysis for Swancor Holding

How Much Debt Does Swancor Holding Carry?

The image below, which you can click on for greater detail, shows that Swancor Holding had debt of NT$1.68b at the end of June 2024, a reduction from NT$2.67b over a year. But on the other hand it also has NT$4.12b in cash, leading to a NT$2.44b net cash position.

A Look At Swancor Holding's Liabilities

Zooming in on the latest balance sheet data, we can see that Swancor Holding had liabilities of NT$5.00b due within 12 months and liabilities of NT$452.3m due beyond that. Offsetting these obligations, it had cash of NT$4.12b as well as receivables valued at NT$3.57b due within 12 months. So it actually has NT$2.23b more liquid assets than total liabilities.

This surplus suggests that Swancor Holding is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Swancor Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Swancor Holding saw its EBIT decline by 8.5% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Swancor Holding's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Swancor Holding may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Swancor Holding actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Swancor Holding has NT$2.44b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$645m, being 145% of its EBIT. So is Swancor Holding's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 6 warning signs for Swancor Holding (1 makes us a bit uncomfortable) 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.

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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.