Health Check: How Prudently Does CMC Magnetics (TWSE:2323) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that CMC Magnetics Corporation (TWSE:2323) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for CMC Magnetics

What Is CMC Magnetics's Net Debt?

The chart below, which you can click on for greater detail, shows that CMC Magnetics had NT$4.56b in debt in December 2023; about the same as the year before. However, its balance sheet shows it holds NT$10.1b in cash, so it actually has NT$5.50b net cash.

A Look At CMC Magnetics' Liabilities

We can see from the most recent balance sheet that CMC Magnetics had liabilities of NT$3.28b falling due within a year, and liabilities of NT$3.39b due beyond that. Offsetting this, it had NT$10.1b in cash and NT$1.50b in receivables that were due within 12 months. So it can boast NT$4.88b more liquid assets than total liabilities.

This excess liquidity is a great indication that CMC Magnetics' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, CMC Magnetics boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since CMC Magnetics will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, CMC Magnetics made a loss at the EBIT level, and saw its revenue drop to NT$7.4b, which is a fall of 4.0%. We would much prefer see growth.

So How Risky Is CMC Magnetics?

While CMC Magnetics lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of NT$1.8b. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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 CMC Magnetics that you should be aware of.

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.