These 4 Measures Indicate That Chenbro Micom (TWSE:8210) Is Using Debt Safely

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Chenbro Micom Co., Ltd. (TWSE:8210) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Chenbro Micom

How Much Debt Does Chenbro Micom Carry?

The image below, which you can click on for greater detail, shows that Chenbro Micom had debt of NT$3.29b at the end of March 2024, a reduction from NT$3.89b over a year. But it also has NT$3.69b in cash to offset that, meaning it has NT$399.9m net cash.

A Look At Chenbro Micom's Liabilities

We can see from the most recent balance sheet that Chenbro Micom had liabilities of NT$4.90b falling due within a year, and liabilities of NT$2.63b due beyond that. On the other hand, it had cash of NT$3.69b and NT$2.82b worth of receivables due within a year. So it has liabilities totalling NT$1.02b more than its cash and near-term receivables, combined.

Since publicly traded Chenbro Micom shares are worth a total of NT$32.1b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Chenbro Micom also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Chenbro Micom has boosted its EBIT by 80%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Chenbro Micom 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 company can only pay off debt with cold hard cash, not accounting profits. Chenbro Micom may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Chenbro Micom recorded free cash flow of 48% 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 Chenbro Micom has NT$399.9m in net cash. And it impressed us with its EBIT growth of 80% over the last year. So we don't think Chenbro Micom's use of debt is risky. 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 example, we've discovered 2 warning signs for Chenbro Micom that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com