Kinsus Interconnect Technology (TPE:3189) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Kinsus Interconnect Technology Corp. (TPE:3189) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Kinsus Interconnect Technology

What Is Kinsus Interconnect Technology's Debt?

As you can see below, Kinsus Interconnect Technology had NT$6.63b of debt at September 2020, down from NT$8.88b a year prior. But it also has NT$12.9b in cash to offset that, meaning it has NT$6.31b net cash.

How Healthy Is Kinsus Interconnect Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kinsus Interconnect Technology had liabilities of NT$10.7b due within 12 months and liabilities of NT$2.38b due beyond that. Offsetting this, it had NT$12.9b in cash and NT$4.65b in receivables that were due within 12 months. So it can boast NT$4.50b more liquid assets than total liabilities.

This short term liquidity is a sign that Kinsus Interconnect Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Kinsus Interconnect Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Kinsus Interconnect Technology made a loss at the EBIT level, last year, it was also good to see that it generated NT$914m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Kinsus Interconnect Technology'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Kinsus Interconnect Technology 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. Happily for any shareholders, Kinsus Interconnect Technology actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Kinsus Interconnect Technology has net cash of NT$6.31b, as well as more liquid assets than liabilities. The cherry on top was that in converted 310% of that EBIT to free cash flow, bringing in NT$2.8b. So we don't think Kinsus Interconnect Technology's use of debt is risky. 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. For instance, we've identified 1 warning sign for Kinsus Interconnect Technology that you should be aware of.

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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