Does Chang Wah Electromaterials (TWSE:8070) Have A Healthy Balance Sheet?

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.' 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 note that Chang Wah Electromaterials Inc. (TWSE:8070) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Chang Wah Electromaterials

How Much Debt Does Chang Wah Electromaterials Carry?

You can click the graphic below for the historical numbers, but it shows that Chang Wah Electromaterials had NT$10.6b of debt in June 2024, down from NT$12.0b, one year before. However, its balance sheet shows it holds NT$10.8b in cash, so it actually has NT$234.4m net cash.

How Healthy Is Chang Wah Electromaterials' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Chang Wah Electromaterials had liabilities of NT$9.15b due within 12 months and liabilities of NT$7.74b due beyond that. Offsetting this, it had NT$10.8b in cash and NT$3.72b in receivables that were due within 12 months. So its liabilities total NT$2.36b more than the combination of its cash and short-term receivables.

Of course, Chang Wah Electromaterials has a market capitalization of NT$41.9b, 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. Despite its noteworthy liabilities, Chang Wah Electromaterials boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Chang Wah Electromaterials if management cannot prevent a repeat of the 29% cut to EBIT over the last year. 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 you can't view debt in total isolation; since Chang Wah Electromaterials 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Chang Wah Electromaterials 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. Happily for any shareholders, Chang Wah Electromaterials actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about Chang Wah Electromaterials's liabilities, but we can be reassured by the fact it has has net cash of NT$234.4m. The cherry on top was that in converted 117% of that EBIT to free cash flow, bringing in NT$2.5b. So we don't have any problem with Chang Wah Electromaterials'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 1 warning sign for Chang Wah Electromaterials 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.