Does Vanguard International Semiconductor (GTSM:5347) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Vanguard International Semiconductor Corporation (GTSM:5347) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Vanguard International Semiconductor

What Is Vanguard International Semiconductor's Net Debt?

As you can see below, Vanguard International Semiconductor had NT$2.17b of debt at September 2020, down from NT$4.21b a year prior. However, its balance sheet shows it holds NT$10.8b in cash, so it actually has NT$8.60b net cash.

How Healthy Is Vanguard International Semiconductor's Balance Sheet?

According to the last reported balance sheet, Vanguard International Semiconductor had liabilities of NT$9.68b due within 12 months, and liabilities of NT$2.61b due beyond 12 months. Offsetting this, it had NT$10.8b in cash and NT$5.65b in receivables that were due within 12 months. So it actually has NT$4.13b more liquid assets than total liabilities.

This surplus suggests that Vanguard International Semiconductor has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Vanguard International Semiconductor has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Vanguard International Semiconductor saw its EBIT drop by 3.4% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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 Vanguard International Semiconductor 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. While Vanguard International Semiconductor 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, Vanguard International Semiconductor recorded free cash flow worth 54% 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 Vanguard International Semiconductor has net cash of NT$8.60b, as well as more liquid assets than liabilities. So we are not troubled with Vanguard International Semiconductor's debt use. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Vanguard International Semiconductor's dividend history, without delay!

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.

If you’re looking to trade Vanguard International Semiconductor, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.