PixArt Imaging (GTSM:3227) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that PixArt Imaging Inc. (GTSM:3227) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for PixArt Imaging

How Much Debt Does PixArt Imaging Carry?

As you can see below, at the end of September 2020, PixArt Imaging had NT$284.3m of debt, up from NT$98.9m a year ago. Click the image for more detail. However, it does have NT$4.15b in cash offsetting this, leading to net cash of NT$3.86b.

How Healthy Is PixArt Imaging's Balance Sheet?

The latest balance sheet data shows that PixArt Imaging had liabilities of NT$1.99b due within a year, and liabilities of NT$557.2m falling due after that. Offsetting this, it had NT$4.15b in cash and NT$1.23b in receivables that were due within 12 months. So it actually has NT$2.83b more liquid assets than total liabilities.

This surplus suggests that PixArt Imaging has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, PixArt Imaging boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that PixArt Imaging grew its EBIT by 141% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 PixArt Imaging can strengthen its balance sheet over time. 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. PixArt Imaging 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. Over the last three years, PixArt Imaging actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that PixArt Imaging has net cash of NT$3.86b, as well as more liquid assets than liabilities. The cherry on top was that in converted 123% of that EBIT to free cash flow, bringing in NT$1.4b. So we don't think PixArt Imaging's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for PixArt Imaging you should know about.

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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