Is Concraft Holding (TWSE:4943) Using Too Much 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Concraft Holding Co., Ltd. (TWSE:4943) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Concraft Holding

How Much Debt Does Concraft Holding Carry?

You can click the graphic below for the historical numbers, but it shows that Concraft Holding had NT$936.8m of debt in March 2024, down from NT$1.10b, one year before. However, it does have NT$63.9m in cash offsetting this, leading to net debt of about NT$873.0m.

How Strong Is Concraft Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Concraft Holding had liabilities of NT$1.68b due within 12 months and liabilities of NT$506.1m due beyond that. On the other hand, it had cash of NT$63.9m and NT$568.1m worth of receivables due within a year. So its liabilities total NT$1.55b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of NT$2.29b, so it does suggest shareholders should keep an eye on Concraft Holding's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is Concraft Holding's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Concraft Holding reported revenue of NT$1.7b, which is a gain of 6.0%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Concraft Holding had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable NT$389m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled NT$467m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Concraft Holding (at least 2 which are concerning) , and understanding them should be part of your investment process.

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.