Is Coxon Precise Industrial (TPE:3607) Weighed On By Its Debt Load?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Coxon Precise Industrial Co., Ltd. (TPE:3607) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See 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. But it also has NT$838.4m in cash to offset that, meaning it has NT$638.4m net cash.

A Look At Coxon Precise Industrial's Liabilities

We can see from the most recent balance sheet that Coxon Precise Industrial had liabilities of NT$1.15b falling due within a year, 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 can boast 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. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Coxon Precise Industrial has more cash than debt is arguably a good indication that it can manage its debt safely. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Coxon Precise Industrial made a loss at the EBIT level, and saw its revenue drop to NT$3.1b, which is a fall of 34%. That makes us nervous, to say the least.

So How Risky Is Coxon Precise Industrial?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Coxon Precise Industrial had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through NT$199m of cash and made a loss of NT$832m. But the saving grace is the NT$638.4m on the balance sheet. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Coxon Precise Industrial is showing 2 warning signs in our investment analysis , and 1 of those can't be ignored...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

If you’re looking to trade Coxon Precise Industrial, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide 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@simplywallst.com.