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

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, Walton Advanced Engineering, Inc. (TWSE:8110) does carry debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Walton Advanced Engineering

What Is Walton Advanced Engineering's Debt?

The image below, which you can click on for greater detail, shows that Walton Advanced Engineering had debt of NT$3.26b at the end of March 2024, a reduction from NT$5.60b over a year. However, it also had NT$1.95b in cash, and so its net debt is NT$1.32b.

A Look At Walton Advanced Engineering's Liabilities

Zooming in on the latest balance sheet data, we can see that Walton Advanced Engineering had liabilities of NT$3.47b due within 12 months and liabilities of NT$2.69b due beyond that. Offsetting these obligations, it had cash of NT$1.95b as well as receivables valued at NT$2.20b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$2.01b.

Walton Advanced Engineering has a market capitalization of NT$10.1b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Walton Advanced Engineering made a loss at the EBIT level, and saw its revenue drop to NT$7.4b, which is a fall of 18%. 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$113m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of NT$1.4b and the profit of NT$109m. So one might argue that there's still a chance it can get things on the right track. 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. Case in point: We've spotted 4 warning signs for Walton Advanced Engineering you should be aware of, and 1 of them shouldn't be ignored.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com