Stock Analysis

Is Waffer Technology (TPE:6235) Using Debt In A Risky Way?

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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, Waffer Technology Corporation (TPE:6235) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Waffer Technology

How Much Debt Does Waffer Technology Carry?

As you can see below, Waffer Technology had NT$644.1m of debt at September 2020, down from NT$1.29b a year prior. However, it does have NT$817.0m in cash offsetting this, leading to net cash of NT$172.9m.

TSEC:6235 Debt to Equity History November 18th 2020

How Strong Is Waffer Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Waffer Technology had liabilities of NT$1.46b due within 12 months and liabilities of NT$135.8m due beyond that. Offsetting these obligations, it had cash of NT$817.0m as well as receivables valued at NT$631.2m due within 12 months. So it has liabilities totalling NT$151.6m more than its cash and near-term receivables, combined.

Given Waffer Technology has a market capitalization of NT$2.75b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Waffer Technology also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Waffer Technology will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Waffer Technology made a loss at the EBIT level, and saw its revenue drop to NT$1.9b, which is a fall of 29%. To be frank that doesn't bode well.

So How Risky Is Waffer Technology?

While Waffer Technology lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of NT$575m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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 2 warning signs for Waffer Technology you should be aware of, and 1 of them shouldn't be ignored.

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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