These 4 Measures Indicate That Compeq Manufacturing (TWSE:2313) Is Using Debt Reasonably Well

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

When Is Debt Dangerous?

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. 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. 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.

Check out our latest analysis for Compeq Manufacturing

How Much Debt Does Compeq Manufacturing Carry?

The image below, which you can click on for greater detail, shows that Compeq Manufacturing had debt of NT$13.4b at the end of December 2023, a reduction from NT$14.7b over a year. However, its balance sheet shows it holds NT$16.3b in cash, so it actually has NT$2.93b net cash.

A Look At Compeq Manufacturing's Liabilities

Zooming in on the latest balance sheet data, we can see that Compeq Manufacturing had liabilities of NT$24.0b due within 12 months and liabilities of NT$15.8b due beyond that. Offsetting this, it had NT$16.3b in cash and NT$17.1b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$6.39b.

Given Compeq Manufacturing has a market capitalization of NT$94.4b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Compeq Manufacturing boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Compeq Manufacturing's load is not too heavy, because its EBIT was down 48% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Compeq Manufacturing 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. Compeq Manufacturing 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. In the last three years, Compeq Manufacturing's free cash flow amounted to 45% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Compeq Manufacturing has NT$2.93b in net cash. So we don't have any problem with Compeq Manufacturing's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Compeq Manufacturing that you should be aware of.

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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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.