Is Coxon Precise Industrial (TPE:3607) A Risky Investment?

Warren Buffett famously said, '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 note that Coxon Precise Industrial Co., Ltd. (TPE:3607) does have debt on its balance sheet. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Coxon Precise Industrial

How Much Debt Does Coxon Precise Industrial Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Coxon Precise Industrial had debt of NT$200.0m, up from NT$180.0m in one year. However, its balance sheet shows it holds NT$838.4m in cash, so it actually has NT$638.4m net cash.

A Look At Coxon Precise Industrial's Liabilities

Zooming in on the latest balance sheet data, we can see that Coxon Precise Industrial had liabilities of NT$1.15b due within 12 months and liabilities of NT$366.2m due beyond that. Offsetting these obligations, it had cash of NT$838.4m as well as receivables valued at NT$1.03b due within 12 months. So it actually has NT$348.9m more liquid assets than total liabilities.

This surplus suggests that Coxon Precise Industrial is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Coxon Precise Industrial boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Coxon Precise 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 Coxon Precise Industrial had a loss before interest and tax, and actually shrunk its revenue by 34%, to NT$3.1b. That makes us nervous, to say the least.

So How Risky Is Coxon Precise Industrial?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Coxon Precise Industrial had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of NT$199m and booked a NT$832m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of NT$638.4m. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Coxon Precise Industrial (of which 1 is potentially serious!) 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.

If you decide to trade Coxon Precise Industrial, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.