Is Tong Hsing Electronic Industries (TWSE:6271) Using Too Much 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 Tong Hsing Electronic Industries, Ltd. (TWSE:6271) makes use of debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Tong Hsing Electronic Industries

What Is Tong Hsing Electronic Industries's Debt?

As you can see below, Tong Hsing Electronic Industries had NT$5.01b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has NT$6.52b in cash to offset that, meaning it has NT$1.51b net cash.

A Look At Tong Hsing Electronic Industries' Liabilities

The latest balance sheet data shows that Tong Hsing Electronic Industries had liabilities of NT$5.07b due within a year, and liabilities of NT$3.85b falling due after that. On the other hand, it had cash of NT$6.52b and NT$2.37b worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Tong Hsing Electronic Industries' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the NT$27.6b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Tong Hsing Electronic Industries also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Tong Hsing Electronic Industries grew its EBIT at 14% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Tong Hsing Electronic Industries 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Tong Hsing Electronic Industries 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. Looking at the most recent three years, Tong Hsing Electronic Industries recorded free cash flow of 26% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Tong Hsing Electronic Industries has NT$1.51b in net cash. On top of that, it increased its EBIT by 14% in the last twelve months. So we don't have any problem with Tong Hsing Electronic Industries's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Tong Hsing Electronic Industries that you should be aware of.

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.