Is Voltronic Power Technology (TPE:6409) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Voltronic Power Technology Corp. (TPE:6409) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Voltronic Power Technology

How Much Debt Does Voltronic Power Technology Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Voltronic Power Technology had debt of NT$1.85b, up from NT$584.2m in one year. However, it does have NT$6.42b in cash offsetting this, leading to net cash of NT$4.57b.

How Strong Is Voltronic Power Technology's Balance Sheet?

According to the last reported balance sheet, Voltronic Power Technology had liabilities of NT$7.76b due within 12 months, and liabilities of NT$275.6m due beyond 12 months. On the other hand, it had cash of NT$6.42b and NT$2.07b worth of receivables due within a year. So it can boast NT$464.0m more liquid assets than total liabilities.

Having regard to Voltronic Power Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the NT$78.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Voltronic Power Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Voltronic Power Technology has increased its EBIT by 7.9% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Voltronic Power 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. Voltronic Power 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, Voltronic Power Technology produced sturdy free cash flow equating to 79% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Voltronic Power Technology has net cash of NT$4.57b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$2.5b, being 79% of its EBIT. So we don't think Voltronic Power Technology's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Voltronic Power Technology that you should be aware of.

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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