Does WinWay Technology (TWSE:6515) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, WinWay Technology Co., Ltd. (TWSE:6515) does carry debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 WinWay Technology

What Is WinWay Technology's Debt?

As you can see below, at the end of September 2024, WinWay Technology had NT$855.4m of debt, up from NT$150.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds NT$1.70b in cash, so it actually has NT$846.9m net cash.

A Look At WinWay Technology's Liabilities

The latest balance sheet data shows that WinWay Technology had liabilities of NT$1.67b due within a year, and liabilities of NT$932.3m falling due after that. Offsetting these obligations, it had cash of NT$1.70b as well as receivables valued at NT$1.96b due within 12 months. So it can boast NT$1.05b more liquid assets than total liabilities.

This surplus suggests that WinWay Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, WinWay Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, WinWay Technology grew its EBIT by 4.1% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if WinWay Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. WinWay Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, WinWay Technology created free cash flow amounting to 14% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case WinWay Technology has NT$846.9m in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 4.1% in the last twelve months. So we don't have any problem with WinWay Technology's use of debt. 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. For example - WinWay Technology has 1 warning sign we think you should be aware of.

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.