Thinking Electronic Industrial (TWSE:2428) Could Easily Take On More Debt

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. We note that Thinking Electronic Industrial Co., Ltd. (TWSE:2428) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Thinking Electronic Industrial

What Is Thinking Electronic Industrial's Net Debt?

As you can see below, Thinking Electronic Industrial had NT$1.16b of debt at December 2023, down from NT$1.74b a year prior. But on the other hand it also has NT$4.03b in cash, leading to a NT$2.87b net cash position.

How Healthy Is Thinking Electronic Industrial's Balance Sheet?

According to the last reported balance sheet, Thinking Electronic Industrial had liabilities of NT$1.64b due within 12 months, and liabilities of NT$2.56b due beyond 12 months. Offsetting this, it had NT$4.03b in cash and NT$2.46b in receivables that were due within 12 months. So it can boast NT$2.28b more liquid assets than total liabilities.

This short term liquidity is a sign that Thinking Electronic Industrial could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Thinking Electronic Industrial boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Thinking Electronic Industrial grew its EBIT at 14% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Thinking Electronic Industrial can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Thinking Electronic Industrial 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. Over the most recent three years, Thinking Electronic Industrial recorded free cash flow worth 58% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Thinking Electronic Industrial has NT$2.87b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 14% over the last year. So is Thinking Electronic Industrial's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Thinking Electronic Industrial's earnings per share history for free.

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.