Is Shun On Electronic (TWSE:6283) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Shun On Electronic Co., Ltd. (TWSE:6283) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Shun On Electronic

What Is Shun On Electronic's Net Debt?

As you can see below, Shun On Electronic had NT$275.6m of debt at June 2024, down from NT$406.4m a year prior. But it also has NT$909.8m in cash to offset that, meaning it has NT$634.3m net cash.

A Look At Shun On Electronic's Liabilities

According to the last reported balance sheet, Shun On Electronic had liabilities of NT$658.1m due within 12 months, and liabilities of NT$11.1m due beyond 12 months. Offsetting these obligations, it had cash of NT$909.8m as well as receivables valued at NT$671.0m due within 12 months. So it actually has NT$911.5m more liquid assets than total liabilities.

This surplus suggests that Shun On Electronic is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Shun On Electronic has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shun On Electronic will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Shun On Electronic wasn't profitable at an EBIT level, but managed to grow its revenue by 5.0%, to NT$1.4b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Shun On Electronic?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Shun On Electronic had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of NT$16m and booked a NT$140m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of NT$634.3m. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Shun On Electronic is showing 1 warning sign in our investment analysis , you should know about...

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.