Is Darwin Precisions (TPE:6120) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Darwin Precisions Corporation (TPE:6120) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Darwin Precisions

How Much Debt Does Darwin Precisions Carry?

As you can see below, at the end of September 2020, Darwin Precisions had NT$3.65b of debt, up from NT$3.15b a year ago. Click the image for more detail. However, it does have NT$4.99b in cash offsetting this, leading to net cash of NT$1.35b.

How Strong Is Darwin Precisions' Balance Sheet?

The latest balance sheet data shows that Darwin Precisions had liabilities of NT$4.57b due within a year, and liabilities of NT$4.69b falling due after that. On the other hand, it had cash of NT$4.99b and NT$3.72b worth of receivables due within a year. So it has liabilities totalling NT$550.3m more than its cash and near-term receivables, combined.

Given Darwin Precisions has a market capitalization of NT$9.52b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Darwin Precisions 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 it is Darwin Precisions'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.

Over 12 months, Darwin Precisions made a loss at the EBIT level, and saw its revenue drop to NT$13b, which is a fall of 27%. That makes us nervous, to say the least.

So How Risky Is Darwin Precisions?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Darwin Precisions lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of NT$1.1b and booked a NT$1.2b accounting loss. Given it only has net cash of NT$1.35b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Darwin Precisions has 2 warning signs (and 1 which is significant) we think you should know about.

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. 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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