Is Shih Wei Navigation (TWSE:5608) Using Too Much Debt?

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 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. As with many other companies Shih Wei Navigation Co., Ltd. (TWSE:5608) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Shih Wei Navigation

How Much Debt Does Shih Wei Navigation Carry?

You can click the graphic below for the historical numbers, but it shows that Shih Wei Navigation had NT$9.94b of debt in March 2024, down from NT$11.8b, one year before. However, because it has a cash reserve of NT$2.26b, its net debt is less, at about NT$7.68b.

A Look At Shih Wei Navigation's Liabilities

Zooming in on the latest balance sheet data, we can see that Shih Wei Navigation had liabilities of NT$4.09b due within 12 months and liabilities of NT$7.23b due beyond that. On the other hand, it had cash of NT$2.26b and NT$313.2m worth of receivables due within a year. So it has liabilities totalling NT$8.75b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of NT$8.80b, so it does suggest shareholders should keep an eye on Shih Wei Navigation's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Shih Wei Navigation's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Shih Wei Navigation had a loss before interest and tax, and actually shrunk its revenue by 43%, to NT$3.4b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Shih Wei Navigation's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at NT$139m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled NT$1.1b in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. We've identified 2 warning signs with Shih Wei Navigation (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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.