We Think Tong Hsing Electronic Industries (TPE:6271) Can Manage Its Debt With Ease

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. We can see that Tong Hsing Electronic Industries, Ltd. (TPE:6271) does use debt in its business. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Tong Hsing Electronic Industries

What Is Tong Hsing Electronic Industries's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Tong Hsing Electronic Industries had NT$319.0m of debt, an increase on none, over one year. But on the other hand it also has NT$4.41b in cash, leading to a NT$4.09b net cash position.

How Strong Is Tong Hsing Electronic Industries' Balance Sheet?

We can see from the most recent balance sheet that Tong Hsing Electronic Industries had liabilities of NT$3.80b falling due within a year, and liabilities of NT$426.0m due beyond that. Offsetting these obligations, it had cash of NT$4.41b as well as receivables valued at NT$1.96b due within 12 months. So it actually has NT$2.14b more liquid assets than total liabilities.

This short term liquidity is a sign that Tong Hsing Electronic Industries could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Tong Hsing Electronic Industries has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Tong Hsing Electronic Industries grew its EBIT by 119% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 Tong Hsing Electronic Industries can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Tong Hsing Electronic Industries 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. In the last three years, Tong Hsing Electronic Industries's free cash flow amounted to 34% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Tong Hsing Electronic Industries has net cash of NT$4.09b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 119% over the last year. So is Tong Hsing Electronic Industries's debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 2 warning signs we've spotted with Tong Hsing Electronic Industries .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

When trading Tong Hsing Electronic Industries or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on 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 (at) simplywallst.com.