Is Nidec Chaun-Choung Technology (TPE:6230) Using Too Much Debt?

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 Nidec Chaun-Choung Technology Corporation (TPE:6230) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Nidec Chaun-Choung Technology

What Is Nidec Chaun-Choung Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Nidec Chaun-Choung Technology had NT$320.1m of debt, an increase on none, over one year. However, it does have NT$1.62b in cash offsetting this, leading to net cash of NT$1.30b.

A Look At Nidec Chaun-Choung Technology's Liabilities

The latest balance sheet data shows that Nidec Chaun-Choung Technology had liabilities of NT$3.44b due within a year, and liabilities of NT$577.6m falling due after that. On the other hand, it had cash of NT$1.62b and NT$2.97b worth of receivables due within a year. So it can boast NT$574.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Nidec Chaun-Choung Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Nidec Chaun-Choung Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Nidec Chaun-Choung Technology saw its EBIT drop by 2.9% in the last twelve months. 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 ultimately the future profitability of the business will decide if Nidec Chaun-Choung Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Nidec Chaun-Choung Technology 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. Over the most recent three years, Nidec Chaun-Choung Technology recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 Nidec 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 Nidec Chaun-Choung Technology's use of debt. 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. To that end, you should be aware of the 1 warning sign we've spotted with Nidec Chaun-Choung Technology .

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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