Here's Why Walton Advanced Engineering (TPE:8110) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Walton Advanced Engineering, Inc. (TPE:8110) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Walton Advanced Engineering

What Is Walton Advanced Engineering's Debt?

As you can see below, at the end of December 2020, Walton Advanced Engineering had NT$4.27b of debt, up from NT$3.52b a year ago. Click the image for more detail. However, because it has a cash reserve of NT$2.30b, its net debt is less, at about NT$1.97b.

A Look At Walton Advanced Engineering's Liabilities

According to the last reported balance sheet, Walton Advanced Engineering had liabilities of NT$3.60b due within 12 months, and liabilities of NT$2.49b due beyond 12 months. On the other hand, it had cash of NT$2.30b and NT$1.49b worth of receivables due within a year. So its liabilities total NT$2.30b more than the combination of its cash and short-term receivables.

Walton Advanced Engineering has a market capitalization of NT$9.49b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Walton Advanced Engineering'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.

In the last year Walton Advanced Engineering had a loss before interest and tax, and actually shrunk its revenue by 11%, to NT$6.0b. That's not what we would hope to see.

Caveat Emptor

While Walton Advanced Engineering's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at NT$94m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled NT$1.2b in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Walton Advanced Engineering has 4 warning signs (and 1 which is potentially serious) we think you should know about.

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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