We Think Chicony Electronics (TPE:2385) Can Manage Its Debt With Ease

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. As with many other companies Chicony Electronics Co., Ltd. (TPE:2385) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Chicony Electronics

What Is Chicony Electronics's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Chicony Electronics had NT$1.67b of debt in September 2020, down from NT$6.99b, one year before. But it also has NT$9.17b in cash to offset that, meaning it has NT$7.50b net cash.

How Healthy Is Chicony Electronics's Balance Sheet?

The latest balance sheet data shows that Chicony Electronics had liabilities of NT$39.9b due within a year, and liabilities of NT$988.7m falling due after that. On the other hand, it had cash of NT$9.17b and NT$23.9b worth of receivables due within a year. So its liabilities total NT$7.91b more than the combination of its cash and short-term receivables.

Of course, Chicony Electronics has a market capitalization of NT$61.3b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Chicony Electronics also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Chicony Electronics has been able to increase its EBIT by 28% in twelve months, making it easier to pay down debt. 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 Chicony Electronics's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Chicony Electronics 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. Over the last three years, Chicony Electronics actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While Chicony Electronics does have more liabilities than liquid assets, it also has net cash of NT$7.50b. The cherry on top was that in converted 103% of that EBIT to free cash flow, bringing in NT$7.7b. So we don't think Chicony Electronics's use of debt is risky. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Chicony Electronics's dividend history, without delay!

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. 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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