MLOptic (SHSE:688502) Has A Pretty Healthy Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies MLOptic Corp. (SHSE:688502) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for MLOptic

What Is MLOptic's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 MLOptic had debt of CN¥115.6m, up from CN¥15.9m in one year. However, its balance sheet shows it holds CN¥309.9m in cash, so it actually has CN¥194.3m net cash.

A Look At MLOptic's Liabilities

The latest balance sheet data shows that MLOptic had liabilities of CN¥227.1m due within a year, and liabilities of CN¥29.8m falling due after that. Offsetting this, it had CN¥309.9m in cash and CN¥151.9m in receivables that were due within 12 months. So it can boast CN¥204.9m more liquid assets than total liabilities.

Having regard to MLOptic's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥10.6b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, MLOptic boasts net cash, so it's fair to say it does not have a heavy debt load!

MLOptic's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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 MLOptic'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While MLOptic 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. During the last three years, MLOptic burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case MLOptic has CN¥194.3m in net cash and a decent-looking balance sheet. So we don't have any problem with MLOptic's use of debt. 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 - MLOptic has 2 warning signs we think 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.