Is Chuwa Wool Industry (Taiwan) (TPE:1439) A Risky Investment?

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 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. We can see that Chuwa Wool Industry Co., (Taiwan) Ltd. (TPE:1439) does use debt in its business. But is this debt a concern to shareholders?

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. 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 Chuwa Wool Industry (Taiwan)

What Is Chuwa Wool Industry (Taiwan)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Chuwa Wool Industry (Taiwan) had NT$157.0m of debt, an increase on none, over one year. However, its balance sheet shows it holds NT$870.2m in cash, so it actually has NT$713.2m net cash.

How Strong Is Chuwa Wool Industry (Taiwan)'s Balance Sheet?

The latest balance sheet data shows that Chuwa Wool Industry (Taiwan) had liabilities of NT$174.7m due within a year, and liabilities of NT$438.0k falling due after that. Offsetting this, it had NT$870.2m in cash and NT$53.2m in receivables that were due within 12 months. So it can boast NT$748.2m more liquid assets than total liabilities.

This surplus strongly suggests that Chuwa Wool Industry (Taiwan) has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Chuwa Wool Industry (Taiwan) boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Chuwa Wool Industry (Taiwan) will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Chuwa Wool Industry (Taiwan) made a loss at the EBIT level, and saw its revenue drop to NT$113m, which is a fall of 35%. To be frank that doesn't bode well.

So How Risky Is Chuwa Wool Industry (Taiwan)?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Chuwa Wool Industry (Taiwan) lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of NT$280m and booked a NT$244m accounting loss. With only NT$713.2m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Chuwa Wool Industry (Taiwan) you should know about.

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.

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This article by Simply Wall St is general in nature. 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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