Evergreen Marine Corporation (Taiwan) (TWSE:2603) Could Easily Take On More 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.' 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. As with many other companies Evergreen Marine Corporation (Taiwan) Ltd. (TWSE:2603) makes use of debt. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Evergreen Marine Corporation (Taiwan)

What Is Evergreen Marine Corporation (Taiwan)'s Net Debt?

As you can see below, Evergreen Marine Corporation (Taiwan) had NT$44.6b of debt at September 2024, down from NT$58.3b a year prior. However, it does have NT$244.1b in cash offsetting this, leading to net cash of NT$199.5b.

How Strong Is Evergreen Marine Corporation (Taiwan)'s Balance Sheet?

We can see from the most recent balance sheet that Evergreen Marine Corporation (Taiwan) had liabilities of NT$137.9b falling due within a year, and liabilities of NT$159.6b due beyond that. On the other hand, it had cash of NT$244.1b and NT$39.9b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$13.5b.

Since publicly traded Evergreen Marine Corporation (Taiwan) shares are worth a very impressive total of NT$442.8b, it seems unlikely that this level of liabilities would be a major threat. 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, Evergreen Marine Corporation (Taiwan) boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Evergreen Marine Corporation (Taiwan) grew its EBIT by 106% over twelve months. That boost will make it even easier to pay down debt going forward. 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 Evergreen Marine Corporation (Taiwan)'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. Evergreen Marine Corporation (Taiwan) 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. During the last three years, Evergreen Marine Corporation (Taiwan) generated free cash flow amounting to a very robust 95% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about Evergreen Marine Corporation (Taiwan)'s liabilities, but we can be reassured by the fact it has has net cash of NT$199.5b. And it impressed us with free cash flow of NT$123b, being 95% of its EBIT. So we don't think Evergreen Marine Corporation (Taiwan)'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. Be aware that Evergreen Marine Corporation (Taiwan) is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...

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.