Here's Why Chaun-Choung Technology (TPE:6230) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Chaun-Choung Technology Corp. (TPE:6230) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Chaun-Choung Technology

What Is Chaun-Choung Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Chaun-Choung Technology had NT$320.1m of debt, an increase on none, over one year. But it also has NT$1.62b in cash to offset that, meaning it has NT$1.30b net cash.

How Strong Is Chaun-Choung Technology's Balance Sheet?

We can see from the most recent balance sheet that Chaun-Choung Technology had liabilities of NT$3.44b falling due within a year, and liabilities of NT$577.6m due beyond that. Offsetting these obligations, it had cash of NT$1.62b as well as receivables valued at NT$2.97b due within 12 months. So it can boast NT$574.8m more liquid assets than total liabilities.

This surplus suggests that Chaun-Choung Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Chaun-Choung Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Chaun-Choung Technology saw its EBIT decline by 3.0% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Chaun-Choung Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Chaun-Choung Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Chaun-Choung Technology produced sturdy free cash flow equating to 53% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Chaun-Choung Technology has net cash of NT$1.30b, as well as more liquid assets than liabilities. So we don't have any problem with Chaun-Choung Technology's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Chaun-Choung Technology's earnings per share history for free.

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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