E-Lead Electronic (TPE:2497) Is Making Moderate Use Of 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.' 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. Importantly, E-Lead Electronic Co., Ltd. (TPE:2497) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for E-Lead Electronic

What Is E-Lead Electronic's Net Debt?

As you can see below, E-Lead Electronic had NT$864.4m of debt at December 2020, down from NT$900.7m a year prior. However, it also had NT$581.2m in cash, and so its net debt is NT$283.2m.

How Healthy Is E-Lead Electronic's Balance Sheet?

According to the last reported balance sheet, E-Lead Electronic had liabilities of NT$1.07b due within 12 months, and liabilities of NT$449.4m due beyond 12 months. On the other hand, it had cash of NT$581.2m and NT$401.7m worth of receivables due within a year. So its liabilities total NT$536.1m more than the combination of its cash and short-term receivables.

Of course, E-Lead Electronic has a market capitalization of NT$4.07b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But it is E-Lead Electronic's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year E-Lead Electronic had a loss before interest and tax, and actually shrunk its revenue by 26%, to NT$1.6b. That makes us nervous, to say the least.

Caveat Emptor

While E-Lead Electronic's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at NT$88m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of NT$82m into a profit. So to be blunt we do think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for E-Lead Electronic that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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.
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