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. We can see that In Win Development Inc. (TPE:6117) does use debt in its business. But the real question is whether this debt is making the company risky.
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for In Win Development
What Is In Win Development's Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 In Win Development had NT$1.27b of debt, an increase on NT$800.0m, over one year. However, because it has a cash reserve of NT$622.6m, its net debt is less, at about NT$642.4m.
How Healthy Is In Win Development's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that In Win Development had liabilities of NT$1.42b due within 12 months and liabilities of NT$501.7m due beyond that. Offsetting these obligations, it had cash of NT$622.6m as well as receivables valued at NT$343.3m due within 12 months. So it has liabilities totalling NT$952.8m more than its cash and near-term receivables, combined.
This is a mountain of leverage relative to its market capitalization of NT$1.44b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 In Win Development 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.
In the last year In Win Development wasn't profitable at an EBIT level, but managed to grow its revenue by 6.8%, to NT$2.2b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Importantly, In Win Development had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost NT$70m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled NT$475m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Be aware that In Win Development is showing 1 warning sign in our investment analysis , you should know about...
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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About TWSE:6117
In Win Development
Processes, manufactures, and trades in computer and peripheral equipment, and plastic products in Europe, the United States, Japan, Taiwan, and internationally.
Solid track record with adequate balance sheet.
