Is Onano Industrial (TPE:6405) Weighed On By Its Debt Load?

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 Onano Industrial Corp. (TPE:6405) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Onano Industrial

What Is Onano Industrial's Debt?

The image below, which you can click on for greater detail, shows that Onano Industrial had debt of NT$163.8m at the end of September 2020, a reduction from NT$576.9m over a year. But on the other hand it also has NT$1.11b in cash, leading to a NT$950.9m net cash position.

A Look At Onano Industrial's Liabilities

The latest balance sheet data shows that Onano Industrial had liabilities of NT$128.2m due within a year, and liabilities of NT$134.9m falling due after that. On the other hand, it had cash of NT$1.11b and NT$157.1m worth of receivables due within a year. So it actually has NT$1.01b more liquid assets than total liabilities.

This excess liquidity is a great indication that Onano Industrial's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Onano Industrial boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Onano Industrial'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, Onano Industrial made a loss at the EBIT level, and saw its revenue drop to NT$493m, which is a fall of 21%. To be frank that doesn't bode well.

So How Risky Is Onano Industrial?

Although Onano Industrial had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of NT$119m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. There's no doubt the next few years will be crucial to how the business matures. 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. To that end, you should be aware of the 3 warning signs we've spotted with Onano Industrial .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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