Radiant Opto-Electronics (TPE:6176) Seems To Use Debt Rather Sparingly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Radiant Opto-Electronics Corporation (TPE:6176) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. 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.

See our latest analysis for Radiant Opto-Electronics

How Much Debt Does Radiant Opto-Electronics Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Radiant Opto-Electronics had debt of NT$13.1b, up from NT$7.31b in one year. But it also has NT$20.3b in cash to offset that, meaning it has NT$7.25b net cash.

How Healthy Is Radiant Opto-Electronics' Balance Sheet?

The latest balance sheet data shows that Radiant Opto-Electronics had liabilities of NT$28.2b due within a year, and liabilities of NT$754.4m falling due after that. Offsetting this, it had NT$20.3b in cash and NT$13.9b in receivables that were due within 12 months. So it actually has NT$5.36b more liquid assets than total liabilities.

This surplus suggests that Radiant Opto-Electronics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Radiant Opto-Electronics has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Radiant Opto-Electronics saw its EBIT drop by 3.3% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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 Radiant Opto-Electronics'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 company can only pay off debt with cold hard cash, not accounting profits. Radiant Opto-Electronics 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. During the last three years, Radiant Opto-Electronics generated free cash flow amounting to a very robust 98% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Radiant Opto-Electronics has net cash of NT$7.25b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$4.4b, being 98% of its EBIT. So is Radiant Opto-Electronics's debt a risk? It doesn't seem so to us. 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 example, we've discovered 2 warning signs for Radiant Opto-Electronics that you should be aware of before investing here.

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.

If you decide to trade Radiant Opto-Electronics, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.