King Slide Works (TWSE:2059) Seems To Use Debt Quite Sensibly

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 can see that King Slide Works Co., Ltd. (TWSE:2059) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for King Slide Works

What Is King Slide Works's Net Debt?

As you can see below, King Slide Works had NT$867.1m of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have NT$13.5b in cash offsetting this, leading to net cash of NT$12.6b.

A Look At King Slide Works' Liabilities

According to the last reported balance sheet, King Slide Works had liabilities of NT$2.17b due within 12 months, and liabilities of NT$1.97b due beyond 12 months. Offsetting these obligations, it had cash of NT$13.5b as well as receivables valued at NT$1.66b due within 12 months. So it can boast NT$11.0b more liquid assets than total liabilities.

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

It is just as well that King Slide Works's load is not too heavy, because its EBIT was down 23% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine King Slide Works'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. King Slide Works 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, King Slide Works produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case King Slide Works has NT$12.6b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 72% of that EBIT to free cash flow, bringing in NT$2.9b. So we don't have any problem with King Slide Works's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for King Slide Works you should know about.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.