Health Check: How Prudently Does Darwin Precisions (TWSE:6120) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Darwin Precisions Corporation (TWSE:6120) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Darwin Precisions

What Is Darwin Precisions's Net Debt?

The image below, which you can click on for greater detail, shows that Darwin Precisions had debt of NT$1.86b at the end of September 2024, a reduction from NT$3.40b over a year. However, its balance sheet shows it holds NT$7.13b in cash, so it actually has NT$5.27b net cash.

A Look At Darwin Precisions' Liabilities

We can see from the most recent balance sheet that Darwin Precisions had liabilities of NT$6.95b falling due within a year, and liabilities of NT$2.39b due beyond that. On the other hand, it had cash of NT$7.13b and NT$3.66b worth of receivables due within a year. So it actually has NT$1.45b more liquid assets than total liabilities.

This surplus suggests that Darwin Precisions is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Darwin Precisions has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Darwin Precisions will need earnings to service that debt. 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 reported revenue of NT$21b, which is a gain of 31%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Darwin Precisions?

While Darwin Precisions lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of NT$192m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We think its revenue growth of 31% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Darwin Precisions is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.