We Think E-Lead Electronic (TPE:2497) Has A Fair Chunk Of 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 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. We note that E-Lead Electronic Co., Ltd. (TPE:2497) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for E-Lead Electronic

What Is E-Lead Electronic's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 E-Lead Electronic had debt of NT$986.7m, up from NT$832.5m in one year. On the flip side, it has NT$586.6m in cash leading to net debt of about NT$400.1m.

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

The latest balance sheet data shows that E-Lead Electronic had liabilities of NT$1.08b due within a year, and liabilities of NT$418.1m falling due after that. On the other hand, it had cash of NT$586.6m and NT$381.9m worth of receivables due within a year. So its liabilities total NT$527.2m more than the combination of its cash and short-term receivables.

Of course, E-Lead Electronic has a market capitalization of NT$4.65b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

Over 12 months, E-Lead Electronic made a loss at the EBIT level, and saw its revenue drop to NT$1.6b, which is a fall of 27%. To be frank that doesn't bode well.

Caveat Emptor

Not only did E-Lead Electronic'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$121m. 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. However, it doesn't help that it burned through NT$55m of cash over the last year. So to be blunt we 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. Case in point: We've spotted 3 warning signs for E-Lead Electronic you should be aware of, and 2 of them are significant.

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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