Is Darwin Precisions (TWSE:6120) Using Debt Sensibly?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Darwin Precisions Corporation (TWSE:6120) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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.

View our latest analysis for Darwin Precisions

How Much Debt Does Darwin Precisions Carry?

You can click the graphic below for the historical numbers, but it shows that Darwin Precisions had NT$2.93b of debt in December 2023, down from NT$4.09b, one year before. However, it does have NT$6.20b in cash offsetting this, leading to net cash of NT$3.27b.

A Look At Darwin Precisions' Liabilities

The latest balance sheet data shows that Darwin Precisions had liabilities of NT$5.97b due within a year, and liabilities of NT$3.04b falling due after that. Offsetting this, it had NT$6.20b in cash and NT$4.11b in receivables that were due within 12 months. So it actually has NT$1.30b more liquid assets than total liabilities.

This short term liquidity is a sign that Darwin Precisions could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Darwin Precisions boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Darwin Precisions'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 Darwin Precisions wasn't profitable at an EBIT level, but managed to grow its revenue by 23%, to NT$18b. Shareholders probably have their fingers crossed that it can grow its way to profits.

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$115m. 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. Keeping in mind its 23% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Darwin Precisions 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. 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.