Is CMC Magnetics (TPE:2323) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies CMC Magnetics Corporation (TPE:2323) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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 CMC Magnetics

What Is CMC Magnetics's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 CMC Magnetics had debt of NT$3.07b, up from NT$1.66b in one year. But on the other hand it also has NT$7.65b in cash, leading to a NT$4.59b net cash position.

A Look At CMC Magnetics' Liabilities

According to the last reported balance sheet, CMC Magnetics had liabilities of NT$3.60b due within 12 months, and liabilities of NT$2.63b due beyond 12 months. On the other hand, it had cash of NT$7.65b and NT$2.52b worth of receivables due within a year. So it can boast NT$3.94b more liquid assets than total liabilities.

This luscious liquidity implies that CMC Magnetics' balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, CMC Magnetics 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 you can't view debt in total isolation; since CMC Magnetics will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, CMC Magnetics reported revenue of NT$8.6b, which is a gain of 14%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is CMC Magnetics?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that CMC Magnetics had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of NT$424m and booked a NT$446m accounting loss. With only NT$4.59b on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for CMC Magnetics that you should be aware of before investing here.

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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