Does Nishoku Technology (TPE:3679) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Nishoku Technology Inc. (TPE:3679) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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, 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.

Check out our latest analysis for Nishoku Technology

How Much Debt Does Nishoku Technology Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Nishoku Technology had debt of NT$2.14b, up from NT$1.99b in one year. But on the other hand it also has NT$2.99b in cash, leading to a NT$849.3m net cash position.

How Strong Is Nishoku Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nishoku Technology had liabilities of NT$2.07b due within 12 months and liabilities of NT$1.82b due beyond that. Offsetting this, it had NT$2.99b in cash and NT$1.64b in receivables that were due within 12 months. So it actually has NT$744.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Nishoku Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Nishoku Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Nishoku Technology grew its EBIT by 219% over twelve months. That boost will make it even easier to pay down debt going forward. 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 Nishoku Technology'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Nishoku Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Nishoku Technology generated free cash flow amounting to a very robust 100% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Nishoku Technology has NT$849.3m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$485m, being 100% of its EBIT. So we don't think Nishoku Technology's use of debt is risky. 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. To that end, you should learn about the 3 warning signs we've spotted with Nishoku Technology (including 1 which shouldn't be ignored) .

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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