Voltronic Power Technology (TWSE:6409) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Voltronic Power Technology Corp. (TWSE:6409) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Voltronic Power Technology

What Is Voltronic Power Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Voltronic Power Technology had NT$831.8m of debt in December 2023, down from NT$929.7m, one year before. However, it does have NT$5.04b in cash offsetting this, leading to net cash of NT$4.21b.

How Healthy Is Voltronic Power Technology's Balance Sheet?

The latest balance sheet data shows that Voltronic Power Technology had liabilities of NT$5.48b due within a year, and liabilities of NT$913.5m falling due after that. Offsetting this, it had NT$5.04b in cash and NT$3.17b in receivables that were due within 12 months. So it actually has NT$1.81b 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$140.4b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Voltronic Power Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Voltronic Power Technology's load is not too heavy, because its EBIT was down 22% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Voltronic Power Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Voltronic Power Technology recorded free cash flow worth 75% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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$4.21b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$3.9b, being 75% of its EBIT. So we are not troubled with Voltronic Power Technology's debt use. 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. For example, we've discovered 1 warning sign for Voltronic Power Technology that you should be aware of before investing here.

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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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.