These 4 Measures Indicate That Visual Photonics Epitaxy (TPE:2455) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Visual Photonics Epitaxy Co., Ltd. (TPE:2455) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Visual Photonics Epitaxy

What Is Visual Photonics Epitaxy's Net Debt?

As you can see below, at the end of September 2020, Visual Photonics Epitaxy had NT$980.0m of debt, up from NT$920.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds NT$997.3m in cash, so it actually has NT$17.3m net cash.

A Look At Visual Photonics Epitaxy's Liabilities

According to the last reported balance sheet, Visual Photonics Epitaxy had liabilities of NT$1.10b due within 12 months, and liabilities of NT$400.3m due beyond 12 months. On the other hand, it had cash of NT$997.3m and NT$387.5m worth of receivables due within a year. So it has liabilities totalling NT$113.1m more than its cash and near-term receivables, combined.

Having regard to Visual Photonics Epitaxy's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the NT$20.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Visual Photonics Epitaxy boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Visual Photonics Epitaxy grew its EBIT by 20% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Visual Photonics Epitaxy will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Visual Photonics Epitaxy 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. Looking at the most recent three years, Visual Photonics Epitaxy recorded free cash flow of 27% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

We could understand if investors are concerned about Visual Photonics Epitaxy's liabilities, but we can be reassured by the fact it has has net cash of NT$17.3m. And it impressed us with its EBIT growth of 20% over the last year. So we don't think Visual Photonics Epitaxy's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Visual Photonics Epitaxy (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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