Is HY Electronic (Cayman) (TPE:6573) Using Too Much Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies HY Electronic (Cayman) Limited (TPE:6573) makes use of debt. But is this debt a concern to shareholders?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for HY Electronic (Cayman)

What Is HY Electronic (Cayman)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that HY Electronic (Cayman) had NT$690.9m of debt in December 2020, down from NT$984.4m, one year before. However, it does have NT$209.5m in cash offsetting this, leading to net debt of about NT$481.5m.

A Look At HY Electronic (Cayman)'s Liabilities

We can see from the most recent balance sheet that HY Electronic (Cayman) had liabilities of NT$1.27b falling due within a year, and liabilities of NT$390.6m due beyond that. Offsetting these obligations, it had cash of NT$209.5m as well as receivables valued at NT$653.1m due within 12 months. So its liabilities total NT$801.7m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since HY Electronic (Cayman) has a market capitalization of NT$1.62b, and so it could probably strengthen its balance sheet by raising capital if it needed to. 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 you can't view debt in total isolation; since HY Electronic (Cayman) will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, HY Electronic (Cayman) made a loss at the EBIT level, and saw its revenue drop to NT$1.6b, which is a fall of 8.0%. We would much prefer see growth.

Caveat Emptor

Importantly, HY Electronic (Cayman) had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping NT$185m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through NT$155m 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. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for HY Electronic (Cayman) (of which 2 are a bit unpleasant!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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