Does Chant Sincere (TPE:6205) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Chant Sincere Co., Ltd. (TPE:6205) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

See our latest analysis for Chant Sincere

How Much Debt Does Chant Sincere Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Chant Sincere had NT$341.6m of debt, an increase on none, over one year. However, its balance sheet shows it holds NT$1.28b in cash, so it actually has NT$936.2m net cash.

How Strong Is Chant Sincere's Balance Sheet?

According to the last reported balance sheet, Chant Sincere had liabilities of NT$429.0m due within 12 months, and liabilities of NT$447.1m due beyond 12 months. Offsetting these obligations, it had cash of NT$1.28b as well as receivables valued at NT$351.2m due within 12 months. So it can boast NT$752.9m more liquid assets than total liabilities.

It's good to see that Chant Sincere has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Chant Sincere has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Chant Sincere has boosted its EBIT by 99%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Chant Sincere 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Chant Sincere has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Chant Sincere produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Chant Sincere has NT$936.2m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 99% over the last year. So we don't think Chant Sincere's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Chant Sincere (of which 1 is a bit unpleasant!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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