Is Elite Semiconductor Microelectronics Tech (TPE:3006) A Risky Investment?

Warren Buffett famously said, '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 Elite Semiconductor Microelectronics Tech Inc (TPE:3006) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Elite Semiconductor Microelectronics Tech

What Is Elite Semiconductor Microelectronics Tech's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Elite Semiconductor Microelectronics Tech had NT$1.19b of debt, an increase on NT$369.9m, over one year. However, its balance sheet shows it holds NT$2.67b in cash, so it actually has NT$1.48b net cash.

How Strong Is Elite Semiconductor Microelectronics Tech's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Elite Semiconductor Microelectronics Tech had liabilities of NT$4.45b due within 12 months and liabilities of NT$109.8m due beyond that. Offsetting these obligations, it had cash of NT$2.67b as well as receivables valued at NT$1.81b due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Elite Semiconductor Microelectronics Tech'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$15.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Elite Semiconductor Microelectronics Tech also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Elite Semiconductor Microelectronics Tech grew its EBIT by 300% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. Over the last three years, Elite Semiconductor Microelectronics Tech saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

We could understand if investors are concerned about Elite Semiconductor Microelectronics Tech's liabilities, but we can be reassured by the fact it has has net cash of NT$1.48b. And it impressed us with its EBIT growth of 300% over the last year. So we are not troubled with Elite Semiconductor Microelectronics Tech's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Elite Semiconductor Microelectronics Tech (including 1 which is makes us a bit uncomfortable) .

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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