We Think Nidec Chaun-Choung Technology (TWSE:6230) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Nidec Chaun-Choung Technology Corporation (TWSE:6230) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Nidec Chaun-Choung Technology

What Is Nidec Chaun-Choung Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Nidec Chaun-Choung Technology had NT$519.2m of debt in June 2024, down from NT$918.6m, one year before. However, it does have NT$3.05b in cash offsetting this, leading to net cash of NT$2.54b.

How Healthy Is Nidec Chaun-Choung Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nidec Chaun-Choung Technology had liabilities of NT$3.08b due within 12 months and liabilities of NT$1.10b due beyond that. Offsetting these obligations, it had cash of NT$3.05b as well as receivables valued at NT$2.37b due within 12 months. So it actually has NT$1.24b more liquid assets than total liabilities.

This short term liquidity is a sign that Nidec Chaun-Choung Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Nidec Chaun-Choung Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Nidec Chaun-Choung Technology's saving grace is its low debt levels, because its EBIT has tanked 64% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Nidec Chaun-Choung Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Nidec Chaun-Choung Technology 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. During the last three years, Nidec Chaun-Choung Technology produced sturdy free cash flow equating to 55% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Nidec Chaun-Choung Technology has net cash of NT$2.54b, as well as more liquid assets than liabilities. So we don't have any problem with Nidec Chaun-Choung Technology's use of debt. 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 instance, we've identified 2 warning signs for Nidec Chaun-Choung Technology that you should be aware of.

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.