Is Machvision (TPE:3563) A Risky Investment?

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.' 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 Machvision Inc. (TPE:3563) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Machvision

What Is Machvision's Debt?

As you can see below, at the end of September 2020, Machvision had NT$216.1m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds NT$1.50b in cash, so it actually has NT$1.28b net cash.

How Healthy Is Machvision's Balance Sheet?

According to the last reported balance sheet, Machvision had liabilities of NT$923.5m due within 12 months, and liabilities of NT$284.6m due beyond 12 months. Offsetting these obligations, it had cash of NT$1.50b as well as receivables valued at NT$1.15b due within 12 months. So it can boast NT$1.44b more liquid assets than total liabilities.

This surplus suggests that Machvision has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Machvision boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Machvision's load is not too heavy, because its EBIT was down 42% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Machvision can strengthen its balance sheet over time. 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. While Machvision 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. Over the most recent three years, Machvision 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 it is always sensible to investigate a company's debt, in this case Machvision has NT$1.28b in net cash and a decent-looking balance sheet. So we don't have any problem with Machvision's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Machvision that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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