Nishoku Technology (TPE:3679) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Nishoku Technology Inc. (TPE:3679) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See 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 Healthy Is Nishoku Technology's Balance Sheet?

We can see from the most recent balance sheet that Nishoku Technology had liabilities of NT$2.07b falling due within a year, and liabilities of NT$1.82b due beyond that. On the other hand, it had cash of NT$2.99b and NT$1.64b worth of receivables due within a year. 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!

Better yet, Nishoku Technology grew its EBIT by 219% last year, which is an impressive improvement. 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 ultimately the future profitability of the business will decide if Nishoku Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the last three years, Nishoku Technology recorded free cash flow worth a fulsome 100% of its EBIT, which is stronger than we'd usually 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. The cherry on top was that in converted 100% of that EBIT to free cash flow, bringing in NT$485m. So we don't think Nishoku Technology's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Nishoku Technology (of which 1 is significant!) you should know about.

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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