Is Nan Pao Resins Chemical (TWSE:4766) Using Too Much Debt?

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. As with many other companies Nan Pao Resins Chemical Co., Ltd. (TWSE:4766) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Nan Pao Resins Chemical

What Is Nan Pao Resins Chemical's Debt?

You can click the graphic below for the historical numbers, but it shows that Nan Pao Resins Chemical had NT$2.87b of debt in December 2023, down from NT$3.22b, one year before. But it also has NT$5.17b in cash to offset that, meaning it has NT$2.29b net cash.

A Look At Nan Pao Resins Chemical's Liabilities

We can see from the most recent balance sheet that Nan Pao Resins Chemical had liabilities of NT$6.39b falling due within a year, and liabilities of NT$2.73b due beyond that. Offsetting these obligations, it had cash of NT$5.17b as well as receivables valued at NT$5.10b due within 12 months. So it can boast NT$1.15b more liquid assets than total liabilities.

This short term liquidity is a sign that Nan Pao Resins Chemical could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Nan Pao Resins Chemical boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Nan Pao Resins Chemical has boosted its EBIT by 62%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Nan Pao Resins Chemical'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Nan Pao Resins Chemical has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Nan Pao Resins Chemical recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Nan Pao Resins Chemical has NT$2.29b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 62% over the last year. So is Nan Pao Resins Chemical's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Nan Pao Resins Chemical you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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

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.