Pegavision (TWSE:6491) Has A Pretty Healthy Balance Sheet

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Pegavision Corporation (TWSE:6491) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Pegavision

What Is Pegavision's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Pegavision had debt of NT$1.05b, up from NT$809.9m in one year. However, it does have NT$3.89b in cash offsetting this, leading to net cash of NT$2.85b.

A Look At Pegavision's Liabilities

Zooming in on the latest balance sheet data, we can see that Pegavision had liabilities of NT$3.62b due within 12 months and liabilities of NT$610.7m due beyond that. Offsetting this, it had NT$3.89b in cash and NT$900.2m in receivables that were due within 12 months. So it actually has NT$564.7m more liquid assets than total liabilities.

This state of affairs indicates that Pegavision's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the NT$37.5b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Pegavision boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Pegavision grew its EBIT at 19% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Pegavision can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Pegavision 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. During the last three years, Pegavision burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Pegavision has NT$2.85b in net cash and a decent-looking balance sheet. And we liked the look of last year's 19% year-on-year EBIT growth. So we don't have any problem with Pegavision's use of debt. 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. For instance, we've identified 3 warning signs for Pegavision (1 is a bit concerning) 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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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.