RDC Semiconductor (GTSM:3228) Has A Pretty Healthy Balance Sheet

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, RDC Semiconductor Co., Ltd. (GTSM:3228) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 RDC Semiconductor

What Is RDC Semiconductor's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 RDC Semiconductor had debt of NT$80.8m, up from NT$50.3m in one year. But on the other hand it also has NT$186.9m in cash, leading to a NT$106.1m net cash position.

How Strong Is RDC Semiconductor's Balance Sheet?

The latest balance sheet data shows that RDC Semiconductor had liabilities of NT$173.1m due within a year, and liabilities of NT$9.95m falling due after that. Offsetting these obligations, it had cash of NT$186.9m as well as receivables valued at NT$43.1m due within 12 months. So it can boast NT$46.9m more liquid assets than total liabilities.

This state of affairs indicates that RDC Semiconductor's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the NT$12.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that RDC Semiconductor has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, RDC Semiconductor turned things around in the last 12 months, delivering and EBIT of NT$7.1m. When analysing debt levels, the balance sheet is the obvious place to start. But it is RDC Semiconductor's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. RDC Semiconductor 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. Happily for any shareholders, RDC Semiconductor actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that RDC Semiconductor has net cash of NT$106.1m, as well as more liquid assets than liabilities. The cherry on top was that in converted 819% of that EBIT to free cash flow, bringing in NT$58m. So we don't think RDC Semiconductor's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - RDC Semiconductor has 1 warning sign we think you should be aware of.

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. 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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