Is Powertech Industrial (TWSE:3296) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Powertech Industrial Co., Ltd. (TWSE:3296) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Powertech Industrial

What Is Powertech Industrial's Net Debt?

As you can see below, at the end of September 2024, Powertech Industrial had NT$430.0m of debt, up from NT$260.0m a year ago. Click the image for more detail. However, it does have NT$867.8m in cash offsetting this, leading to net cash of NT$437.8m.

How Strong Is Powertech Industrial's Balance Sheet?

We can see from the most recent balance sheet that Powertech Industrial had liabilities of NT$1.04b falling due within a year, and liabilities of NT$48.6m due beyond that. Offsetting these obligations, it had cash of NT$867.8m as well as receivables valued at NT$453.9m due within 12 months. So it actually has NT$229.3m more liquid assets than total liabilities.

This surplus suggests that Powertech Industrial has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Powertech Industrial has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Powertech Industrial will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Powertech Industrial made a loss at the EBIT level, and saw its revenue drop to NT$1.6b, which is a fall of 7.4%. That's not what we would hope to see.

So How Risky Is Powertech Industrial?

Although Powertech Industrial had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of NT$28m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Powertech Industrial (of which 2 make us uncomfortable!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.