Good Will Instrument (TPE:2423) Has A Pretty Healthy Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Good Will Instrument Co., Ltd. (TPE:2423) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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. 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. 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 Good Will Instrument

What Is Good Will Instrument's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Good Will Instrument had NT$163.0m of debt, an increase on NT$85.7m, over one year. However, it does have NT$575.8m in cash offsetting this, leading to net cash of NT$412.8m.

How Strong Is Good Will Instrument's Balance Sheet?

We can see from the most recent balance sheet that Good Will Instrument had liabilities of NT$601.6m falling due within a year, and liabilities of NT$139.5m due beyond that. Offsetting this, it had NT$575.8m in cash and NT$663.2m in receivables that were due within 12 months. So it can boast NT$497.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Good Will Instrument could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Good Will Instrument has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that Good Will Instrument has seen its EBIT plunge 19% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Good Will Instrument will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Good Will Instrument 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, Good Will Instrument recorded free cash flow worth a fulsome 99% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Good Will Instrument has NT$412.8m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$346m, being 99% of its EBIT. So is Good Will Instrument's debt a risk? It doesn't seem so to us. 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 instance, we've identified 1 warning sign for Good Will Instrument that you should be aware of.

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. 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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