Does Chenming Electronic Tech (TWSE:3013) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Chenming Electronic Tech. Corp. (TWSE:3013) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Chenming Electronic Tech

What Is Chenming Electronic Tech's Debt?

As you can see below, Chenming Electronic Tech had NT$595.7m of debt at June 2024, down from NT$1.09b a year prior. But on the other hand it also has NT$727.4m in cash, leading to a NT$131.7m net cash position.

A Look At Chenming Electronic Tech's Liabilities

The latest balance sheet data shows that Chenming Electronic Tech had liabilities of NT$3.40b due within a year, and liabilities of NT$514.1m falling due after that. Offsetting this, it had NT$727.4m in cash and NT$2.84b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$344.2m.

This state of affairs indicates that Chenming Electronic Tech's 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$23.1b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Chenming Electronic Tech also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Chenming Electronic Tech grew its EBIT by 126% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Chenming Electronic Tech can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Chenming Electronic Tech 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, Chenming Electronic Tech actually produced more free cash flow than EBIT over the last two 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

We could understand if investors are concerned about Chenming Electronic Tech's liabilities, but we can be reassured by the fact it has has net cash of NT$131.7m. And it impressed us with free cash flow of NT$534m, being 184% of its EBIT. So is Chenming Electronic Tech's debt a risk? It doesn't seem so to us. 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 Chenming Electronic Tech (1 is a bit concerning) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.