Here's Why Arima Optoelectronics (TPE:6289) Can Afford Some Debt

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. As with many other companies Arima Optoelectronics Corp. (TPE:6289) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Arima Optoelectronics

How Much Debt Does Arima Optoelectronics Carry?

As you can see below, Arima Optoelectronics had NT$45.5m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have NT$38.3m in cash offsetting this, leading to net debt of about NT$7.21m.

A Look At Arima Optoelectronics's Liabilities

The latest balance sheet data shows that Arima Optoelectronics had liabilities of NT$188.2m due within a year, and liabilities of NT$35.6m falling due after that. On the other hand, it had cash of NT$38.3m and NT$32.3m worth of receivables due within a year. So its liabilities total NT$153.2m more than the combination of its cash and short-term receivables.

Arima Optoelectronics has a market capitalization of NT$352.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Arima Optoelectronics's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Arima Optoelectronics made a loss at the EBIT level, and saw its revenue drop to NT$77m, which is a fall of 38%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Arima Optoelectronics's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable NT$141m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through NT$44m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Arima Optoelectronics has 5 warning signs (and 1 which can't be ignored) we think you should know about.

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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