Elite Advanced Laser (TPE:3450) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Elite Advanced Laser Corporation (TPE:3450) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. 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.

See our latest analysis for Elite Advanced Laser

What Is Elite Advanced Laser's Debt?

You can click the graphic below for the historical numbers, but it shows that Elite Advanced Laser had NT$182.7m of debt in September 2020, down from NT$224.2m, one year before. However, its balance sheet shows it holds NT$2.30b in cash, so it actually has NT$2.12b net cash.

How Healthy Is Elite Advanced Laser's Balance Sheet?

According to the last reported balance sheet, Elite Advanced Laser had liabilities of NT$1.85b due within 12 months, and liabilities of NT$509.4m due beyond 12 months. On the other hand, it had cash of NT$2.30b and NT$1.44b worth of receivables due within a year. So it can boast NT$1.38b more liquid assets than total liabilities.

This excess liquidity suggests that Elite Advanced Laser is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Elite Advanced Laser boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Elite Advanced Laser grew its EBIT by 8.1% in the last year, making that debt load look even more manageable. 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 Advanced Laser'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. Elite Advanced Laser 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 most recent three years, Elite Advanced Laser recorded free cash flow worth 61% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Elite Advanced Laser has net cash of NT$2.12b, as well as more liquid assets than liabilities. So is Elite Advanced Laser's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Elite Advanced Laser's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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