Is FineMat Applied Materials (TPE:6698) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that FineMat Applied Materials Co., Ltd. (TPE:6698) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for FineMat Applied Materials

What Is FineMat Applied Materials's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 FineMat Applied Materials had debt of NT$337.3m, up from NT$71.0m in one year. But on the other hand it also has NT$609.7m in cash, leading to a NT$272.4m net cash position.

How Healthy Is FineMat Applied Materials' Balance Sheet?

The latest balance sheet data shows that FineMat Applied Materials had liabilities of NT$273.6m due within a year, and liabilities of NT$299.0m falling due after that. Offsetting these obligations, it had cash of NT$609.7m as well as receivables valued at NT$187.4m due within 12 months. So it actually has NT$224.5m more liquid assets than total liabilities.

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

Shareholders should be aware that FineMat Applied Materials's EBIT was down 90% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 FineMat Applied Materials can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While FineMat Applied Materials 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. During the last three years, FineMat Applied Materials burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case FineMat Applied Materials has NT$272.4m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about FineMat Applied Materials's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example FineMat Applied Materials has 5 warning signs (and 1 which can't be ignored) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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