Tong Hsing Electronic Industries (TWSE:6271) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that Tong Hsing Electronic Industries, Ltd. (TWSE:6271) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Tong Hsing Electronic Industries

What Is Tong Hsing Electronic Industries's Net Debt?

As you can see below, Tong Hsing Electronic Industries had NT$5.23b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have NT$5.33b in cash offsetting this, leading to net cash of NT$93.9m.

How Strong Is Tong Hsing Electronic Industries' Balance Sheet?

We can see from the most recent balance sheet that Tong Hsing Electronic Industries had liabilities of NT$3.97b falling due within a year, and liabilities of NT$5.73b due beyond that. On the other hand, it had cash of NT$5.33b and NT$2.26b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$2.11b.

Of course, Tong Hsing Electronic Industries has a market capitalization of NT$33.3b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

It is just as well that Tong Hsing Electronic Industries's load is not too heavy, because its EBIT was down 58% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Tong Hsing Electronic Industries'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 42% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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$93.9m in net cash. So we don't have any problem with Tong Hsing Electronic Industries'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. We've identified 2 warning signs with Tong Hsing Electronic Industries , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

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