Here's Why Compeq Manufacturing (TWSE:2313) Can Manage Its Debt Responsibly

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 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, Compeq Manufacturing Co., Ltd. (TWSE:2313) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Compeq Manufacturing

How Much Debt Does Compeq Manufacturing Carry?

You can click the graphic below for the historical numbers, but it shows that Compeq Manufacturing had NT$13.4b of debt in September 2024, down from NT$15.8b, one year before. But on the other hand it also has NT$18.6b in cash, leading to a NT$5.24b net cash position.

How Strong Is Compeq Manufacturing's Balance Sheet?

The latest balance sheet data shows that Compeq Manufacturing had liabilities of NT$28.7b due within a year, and liabilities of NT$13.6b falling due after that. Offsetting these obligations, it had cash of NT$18.6b as well as receivables valued at NT$17.2b due within 12 months. So its liabilities total NT$6.43b more than the combination of its cash and short-term receivables.

Of course, Compeq Manufacturing has a market capitalization of NT$78.9b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Compeq Manufacturing also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, Compeq Manufacturing grew its EBIT by 4.7% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Compeq Manufacturing'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 Compeq Manufacturing 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, Compeq Manufacturing produced sturdy free cash flow equating to 52% 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 look at a company's total liabilities, it is very reassuring that Compeq Manufacturing has NT$5.24b in net cash. So we don't have any problem with Compeq Manufacturing'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. To that end, you should be aware of the 1 warning sign we've spotted with Compeq Manufacturing .

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.

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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.