Does Global Mixed-Mode Technology (TPE:8081) Have A Healthy Balance Sheet?

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.' 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. We can see that Global Mixed-Mode Technology Inc. (TPE:8081) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Global Mixed-Mode Technology

How Much Debt Does Global Mixed-Mode Technology Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Global Mixed-Mode Technology had debt of NT$571.2m, up from NT$511.4m in one year. But on the other hand it also has NT$2.89b in cash, leading to a NT$2.32b net cash position.

A Look At Global Mixed-Mode Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Global Mixed-Mode Technology had liabilities of NT$2.41b due within 12 months and liabilities of NT$188.5m due beyond that. On the other hand, it had cash of NT$2.89b and NT$1.74b worth of receivables due within a year. So it can boast NT$2.03b more liquid assets than total liabilities.

This short term liquidity is a sign that Global Mixed-Mode Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Global Mixed-Mode Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Global Mixed-Mode Technology grew its EBIT by 61% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Global Mixed-Mode Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Global Mixed-Mode Technology 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. Over the last three years, Global Mixed-Mode Technology recorded free cash flow worth a fulsome 96% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Global Mixed-Mode Technology has NT$2.32b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 96% of that EBIT to free cash flow, bringing in NT$971m. So we don't think Global Mixed-Mode Technology's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Global Mixed-Mode Technology 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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