These 4 Measures Indicate That WinWay Technology (TWSE:6515) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 WinWay Technology Co., Ltd. (TWSE:6515) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for WinWay Technology

What Is WinWay Technology's Debt?

As you can see below, at the end of December 2023, WinWay Technology had NT$395.2m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has NT$899.4m in cash, leading to a NT$504.2m net cash position.

How Healthy Is WinWay Technology's Balance Sheet?

According to the last reported balance sheet, WinWay Technology had liabilities of NT$979.3m due within 12 months, and liabilities of NT$406.8m due beyond 12 months. Offsetting this, it had NT$899.4m in cash and NT$885.4m in receivables that were due within 12 months. So it can boast NT$398.6m more liquid assets than total liabilities.

This state of affairs indicates that WinWay Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the NT$29.1b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, WinWay Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that WinWay Technology's load is not too heavy, because its EBIT was down 59% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While WinWay Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, WinWay Technology created free cash flow amounting to 17% 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$504.2m in net cash and a decent-looking balance sheet. 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. However, not all investment risk resides within the balance sheet - far from it. For example WinWay Technology has 3 warning signs (and 1 which doesn't sit too well with us) 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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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.