We Think I-Chiun Precision Industry (TWSE:2486) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, I-Chiun Precision Industry Co., Ltd. (TWSE:2486) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 I-Chiun Precision Industry

What Is I-Chiun Precision Industry's Net Debt?

As you can see below, I-Chiun Precision Industry had NT$1.23b of debt at September 2024, down from NT$1.90b a year prior. But it also has NT$1.57b in cash to offset that, meaning it has NT$337.5m net cash.

How Strong Is I-Chiun Precision Industry's Balance Sheet?

The latest balance sheet data shows that I-Chiun Precision Industry had liabilities of NT$1.79b due within a year, and liabilities of NT$1.32b falling due after that. Offsetting these obligations, it had cash of NT$1.57b as well as receivables valued at NT$2.36b due within 12 months. So it can boast NT$824.9m more liquid assets than total liabilities.

This surplus suggests that I-Chiun Precision Industry has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that I-Chiun Precision Industry has more cash than debt is arguably a good indication that it can manage its debt safely.

Shareholders should be aware that I-Chiun Precision Industry's EBIT was down 45% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since I-Chiun Precision Industry will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While I-Chiun Precision Industry 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 last three years, I-Chiun Precision Industry recorded free cash flow worth a fulsome 99% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case I-Chiun Precision Industry has NT$337.5m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of -NT$383m, being 99% of its EBIT. So we are not troubled with I-Chiun Precision Industry's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for I-Chiun Precision Industry (1 is significant!) that you should be aware of before investing here.

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.