Does Nan Ya Printed Circuit Board (TPE:8046) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Nan Ya Printed Circuit Board Corporation (TPE:8046) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Nan Ya Printed Circuit Board

What Is Nan Ya Printed Circuit Board's Debt?

As you can see below, Nan Ya Printed Circuit Board had NT$1.72b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have NT$2.82b in cash offsetting this, leading to net cash of NT$1.10b.

A Look At Nan Ya Printed Circuit Board's Liabilities

We can see from the most recent balance sheet that Nan Ya Printed Circuit Board had liabilities of NT$6.76b falling due within a year, and liabilities of NT$3.54b due beyond that. Offsetting these obligations, it had cash of NT$2.82b as well as receivables valued at NT$12.9b due within 12 months. So it can boast NT$5.39b more liquid assets than total liabilities.

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

Although Nan Ya Printed Circuit Board made a loss at the EBIT level, last year, it was also good to see that it generated NT$3.1b in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Nan Ya Printed Circuit Board 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Nan Ya Printed Circuit Board 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 year, Nan Ya Printed Circuit Board burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Nan Ya Printed Circuit Board has net cash of NT$1.10b, as well as more liquid assets than liabilities. So we don't have any problem with Nan Ya Printed Circuit Board's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Nan Ya Printed Circuit Board is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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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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.
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