Does Elite Semiconductor Microelectronics Tech (TPE:3006) 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.' 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. Importantly, Elite Semiconductor Microelectronics Tech Inc (TPE:3006) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Elite Semiconductor Microelectronics Tech

How Much Debt Does Elite Semiconductor Microelectronics Tech Carry?

As you can see below, at the end of December 2020, Elite Semiconductor Microelectronics Tech had NT$1.49b of debt, up from NT$274.0m a year ago. Click the image for more detail. But on the other hand it also has NT$4.10b in cash, leading to a NT$2.61b net cash position.

A Look At Elite Semiconductor Microelectronics Tech's Liabilities

Zooming in on the latest balance sheet data, we can see that Elite Semiconductor Microelectronics Tech had liabilities of NT$4.76b due within 12 months and liabilities of NT$114.9m due beyond that. Offsetting these obligations, it had cash of NT$4.10b as well as receivables valued at NT$1.73b due within 12 months. So it can boast NT$958.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Elite Semiconductor Microelectronics Tech could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Elite Semiconductor Microelectronics Tech boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Elite Semiconductor Microelectronics Tech grew its EBIT by 100% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Elite Semiconductor Microelectronics Tech's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Elite Semiconductor Microelectronics Tech 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. In the last three years, Elite Semiconductor Microelectronics Tech created free cash flow amounting to 16% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Elite Semiconductor Microelectronics Tech has NT$2.61b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 100% over the last year. So we don't think Elite Semiconductor Microelectronics Tech's use of debt is 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Elite Semiconductor Microelectronics Tech (of which 1 is a bit concerning!) you should know about.

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.

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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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