Is Chin-Poon Industrial (TPE:2355) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Chin-Poon Industrial Co., Ltd. (TPE:2355) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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 Chin-Poon Industrial

What Is Chin-Poon Industrial's Debt?

You can click the graphic below for the historical numbers, but it shows that Chin-Poon Industrial had NT$1.31b of debt in December 2020, down from NT$1.45b, one year before. But on the other hand it also has NT$5.18b in cash, leading to a NT$3.87b net cash position.

How Healthy Is Chin-Poon Industrial's Balance Sheet?

We can see from the most recent balance sheet that Chin-Poon Industrial had liabilities of NT$6.26b falling due within a year, and liabilities of NT$909.3m due beyond that. On the other hand, it had cash of NT$5.18b and NT$3.64b worth of receivables due within a year. So it can boast NT$1.66b more liquid assets than total liabilities.

This short term liquidity is a sign that Chin-Poon Industrial could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Chin-Poon Industrial has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Chin-Poon Industrial's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Chin-Poon Industrial made a loss at the EBIT level, and saw its revenue drop to NT$15b, which is a fall of 14%. That's not what we would hope to see.

So How Risky Is Chin-Poon Industrial?

While Chin-Poon Industrial lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of NT$46m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. Case in point: We've spotted 2 warning signs for Chin-Poon Industrial you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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.
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