Does Mospec Semiconductor (TPE:2434) Have A 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.' 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 Mospec Semiconductor Corp. (TPE:2434) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Mospec Semiconductor

What Is Mospec Semiconductor's Net Debt?

As you can see below, Mospec Semiconductor had NT$224.3m of debt at September 2020, down from NT$237.1m a year prior. On the flip side, it has NT$128.6m in cash leading to net debt of about NT$95.7m.

How Strong Is Mospec Semiconductor's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mospec Semiconductor had liabilities of NT$296.5m due within 12 months and liabilities of NT$275.6m due beyond that. Offsetting these obligations, it had cash of NT$128.6m as well as receivables valued at NT$75.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$368.2m.

Mospec Semiconductor has a market capitalization of NT$729.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Mospec 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.

Over 12 months, Mospec Semiconductor made a loss at the EBIT level, and saw its revenue drop to NT$138m, which is a fall of 26%. To be frank that doesn't bode well.

Caveat Emptor

While Mospec Semiconductor's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable NT$143m 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled NT$31m in negative free cash flow over the last twelve months. So to be blunt we think it 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Mospec Semiconductor (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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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