Chicony Electronics (TWSE:2385) Could Easily Take On More Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Chicony Electronics Co., Ltd. (TWSE:2385) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Chicony Electronics

How Much Debt Does Chicony Electronics Carry?

As you can see below, at the end of September 2024, Chicony Electronics had NT$4.85b of debt, up from NT$3.95b a year ago. Click the image for more detail. But it also has NT$28.1b in cash to offset that, meaning it has NT$23.3b net cash.

A Look At Chicony Electronics' Liabilities

The latest balance sheet data shows that Chicony Electronics had liabilities of NT$48.4b due within a year, and liabilities of NT$682.8m falling due after that. Offsetting this, it had NT$28.1b in cash and NT$28.1b in receivables that were due within 12 months. So it actually has NT$7.15b more liquid assets than total liabilities.

This surplus suggests that Chicony Electronics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Chicony Electronics boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Chicony Electronics grew its EBIT by 14% last year, making its debt load easier to handle. 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 Chicony Electronics'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 Chicony Electronics 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. Happily for any shareholders, Chicony Electronics actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Chicony Electronics has NT$23.3b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 118% of that EBIT to free cash flow, bringing in NT$8.8b. So is Chicony Electronics's debt a risk? It doesn't seem so to us. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Chicony Electronics's dividend history, without delay!

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.