Is Orient Semiconductor Electronics (TPE:2329) Using Too Much Debt?

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. As with many other companies Orient Semiconductor Electronics, Limited (TPE:2329) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

See our latest analysis for Orient Semiconductor Electronics

What Is Orient Semiconductor Electronics's Debt?

As you can see below, Orient Semiconductor Electronics had NT$2.98b of debt at December 2020, down from NT$4.85b a year prior. However, because it has a cash reserve of NT$1.85b, its net debt is less, at about NT$1.13b.

How Healthy Is Orient Semiconductor Electronics' Balance Sheet?

The latest balance sheet data shows that Orient Semiconductor Electronics had liabilities of NT$4.65b due within a year, and liabilities of NT$2.23b falling due after that. Offsetting this, it had NT$1.85b in cash and NT$2.80b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$2.24b.

Since publicly traded Orient Semiconductor Electronics shares are worth a total of NT$13.5b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is Orient Semiconductor Electronics's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Orient Semiconductor Electronics had a loss before interest and tax, and actually shrunk its revenue by 21%, to NT$14b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Orient Semiconductor Electronics's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost NT$186m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of NT$266m. So we do think this stock is quite risky. 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. Case in point: We've spotted 2 warning signs for Orient Semiconductor Electronics you should be aware of, and 1 of them is concerning.

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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