These 4 Measures Indicate That King Slide Works (TWSE:2059) Is Using Debt Safely

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, King Slide Works Co., Ltd. (TWSE:2059) does carry debt. 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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

What Is King Slide Works's Net Debt?

As you can see below, King Slide Works had NT$741.2m of debt at December 2024, down from NT$867.1m a year prior. But it also has NT$17.5b in cash to offset that, meaning it has NT$16.8b net cash.

How Healthy Is King Slide Works' Balance Sheet?

According to the last reported balance sheet, King Slide Works had liabilities of NT$3.15b due within 12 months, and liabilities of NT$2.03b due beyond 12 months. Offsetting these obligations, it had cash of NT$17.5b as well as receivables valued at NT$3.18b due within 12 months. So it actually has NT$15.5b more liquid assets than total liabilities.

This surplus suggests that King Slide Works has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

See our latest analysis for King Slide Works

Even more impressive was the fact that King Slide Works grew its EBIT by 111% over twelve months. That boost will make it even easier to pay down debt going forward. 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 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While King Slide Works 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. During the last three years, King Slide Works generated free cash flow amounting to a very robust 85% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that King Slide Works has net cash of NT$16.8b, as well as more liquid assets than liabilities. The cherry on top was that in converted 85% of that EBIT to free cash flow, bringing in NT$4.8b. So we don't think King Slide Works's use of debt is risky. 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. For example, we've discovered 3 warning signs for King Slide Works (1 is a bit unpleasant!) that you should be aware of before investing here.

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.