Bestec Power Electronics (TPE:3308) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Bestec Power Electronics Co., Ltd. (TPE:3308) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Bestec Power Electronics

How Much Debt Does Bestec Power Electronics Carry?

As you can see below, Bestec Power Electronics had NT$608.5m of debt at September 2020, down from NT$661.9m a year prior. However, it does have NT$752.8m in cash offsetting this, leading to net cash of NT$144.3m.

A Look At Bestec Power Electronics' Liabilities

Zooming in on the latest balance sheet data, we can see that Bestec Power Electronics had liabilities of NT$510.0m due within 12 months and liabilities of NT$316.7m due beyond that. Offsetting these obligations, it had cash of NT$752.8m as well as receivables valued at NT$106.8m due within 12 months. So it can boast NT$32.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Bestec Power Electronics could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Bestec Power Electronics boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Bestec Power Electronics'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, Bestec Power Electronics made a loss at the EBIT level, and saw its revenue drop to NT$401m, which is a fall of 38%. To be frank that doesn't bode well.

So How Risky Is Bestec Power Electronics?

Although Bestec Power Electronics had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of NT$26m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Bestec Power Electronics (1 is a bit concerning!) that you should be aware of before investing here.

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. 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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