CASwell (TPE:6416) Has A Rock Solid Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies CASwell Inc. (TPE:6416) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 CASwell

What Is CASwell's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 CASwell had NT$216.3m of debt, an increase on NT$102.9m, over one year. However, it does have NT$963.4m in cash offsetting this, leading to net cash of NT$747.1m.

How Strong Is CASwell's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CASwell had liabilities of NT$1.51b due within 12 months and liabilities of NT$263.9m due beyond that. Offsetting these obligations, it had cash of NT$963.4m as well as receivables valued at NT$1.09b due within 12 months. So it can boast NT$276.9m more liquid assets than total liabilities.

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

On top of that, CASwell grew its EBIT by 47% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine CASwell'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. While CASwell 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, CASwell's free cash flow amounted to 50% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that CASwell has net cash of NT$747.1m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 47% over the last year. So we don't think CASwell's use of debt is risky. 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. Be aware that CASwell is showing 4 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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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