We Think Voltronic Power Technology (TPE:6409) Can Manage Its Debt With Ease

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. We note that Voltronic Power Technology Corp. (TPE:6409) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Voltronic Power Technology

What Is Voltronic Power Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Voltronic Power Technology had debt of NT$1.77b, up from NT$1.09b in one year. But on the other hand it also has NT$4.89b in cash, leading to a NT$3.12b net cash position.

How Strong Is Voltronic Power Technology's Balance Sheet?

According to the last reported balance sheet, Voltronic Power Technology had liabilities of NT$6.32b due within 12 months, and liabilities of NT$258.5m due beyond 12 months. Offsetting these obligations, it had cash of NT$4.89b as well as receivables valued at NT$2.47b due within 12 months. So it actually has NT$770.9m 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 it's very unlikely that the NT$96.6b company is short on cash, but still worth keeping an eye on the 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.

Fortunately, Voltronic Power Technology grew its EBIT by 6.8% in the last year, making that debt load look even more manageable. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 generated free cash flow amounting to a very robust 80% 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 Voltronic Power Technology has NT$3.12b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$2.2b, being 80% of its EBIT. So is Voltronic Power Technology's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Voltronic Power Technology .

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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