Would I-Chiun Precision Industry (TPE:2486) Be Better Off With Less 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. Importantly, I-Chiun Precision Industry Co., Ltd. (TPE:2486) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

View our latest analysis for I-Chiun Precision Industry

What Is I-Chiun Precision Industry's Net Debt?

As you can see below, at the end of September 2020, I-Chiun Precision Industry had NT$1.76b of debt, up from NT$1.66b a year ago. Click the image for more detail. However, it also had NT$717.6m in cash, and so its net debt is NT$1.05b.

A Look At I-Chiun Precision Industry's Liabilities

We can see from the most recent balance sheet that I-Chiun Precision Industry had liabilities of NT$1.81b falling due within a year, and liabilities of NT$1.26b due beyond that. Offsetting this, it had NT$717.6m in cash and NT$1.79b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$566.4m.

Since publicly traded I-Chiun Precision Industry shares are worth a total of NT$3.73b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But it is I-Chiun Precision Industry'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, I-Chiun Precision Industry reported revenue of NT$3.9b, which is a gain of 10%, 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.

Caveat Emptor

Importantly, I-Chiun Precision Industry had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at NT$99m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled NT$392m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with I-Chiun Precision Industry .

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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