Is Chicony Electronics (TWSE:2385) A Risky Investment?

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.' 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. We note that Chicony Electronics Co., Ltd. (TWSE:2385) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Chicony Electronics

What Is Chicony Electronics's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Chicony Electronics had debt of NT$4.40b, up from NT$2.64b in one year. However, its balance sheet shows it holds NT$29.5b in cash, so it actually has NT$25.1b net cash.

How Healthy Is Chicony Electronics' Balance Sheet?

We can see from the most recent balance sheet that Chicony Electronics had liabilities of NT$51.1b falling due within a year, and liabilities of NT$681.0m due beyond that. Offsetting these obligations, it had cash of NT$29.5b as well as receivables valued at NT$22.0b due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Chicony Electronics' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the NT$113.9b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Chicony Electronics boasts net cash, so it's fair to say it does not have a heavy debt load!

Chicony Electronics's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Chicony Electronics 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. Over the last three years, Chicony Electronics actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Chicony Electronics has NT$25.1b in net cash. The cherry on top was that in converted 103% of that EBIT to free cash flow, bringing in NT$13b. So is Chicony Electronics's debt a risk? It doesn't seem so to us. Given Chicony Electronics has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

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.