Does Wha Yu Industrial (TPE:3419) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Wha Yu Industrial Co., Ltd. (TPE:3419) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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, 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Wha Yu Industrial

What Is Wha Yu Industrial's Debt?

As you can see below, at the end of September 2020, Wha Yu Industrial had NT$639.5m of debt, up from NT$313.5m a year ago. Click the image for more detail. However, it also had NT$485.1m in cash, and so its net debt is NT$154.4m.

How Strong Is Wha Yu Industrial's Balance Sheet?

The latest balance sheet data shows that Wha Yu Industrial had liabilities of NT$875.8m due within a year, and liabilities of NT$283.2m falling due after that. Offsetting this, it had NT$485.1m in cash and NT$970.6m in receivables that were due within 12 months. So it can boast NT$296.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Wha Yu Industrial could probably pay off its debt with ease, as its balance sheet is far from stretched. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Wha Yu Industrial 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.

In the last year Wha Yu Industrial wasn't profitable at an EBIT level, but managed to grow its revenue by 23%, to NT$1.7b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Wha Yu Industrial still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost NT$123m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Wha Yu Industrial has 3 warning signs (and 1 which is a bit concerning) we think you should know about.

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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