Does Orient Semiconductor Electronics (TWSE:2329) Have A Healthy Balance Sheet?

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. We note that Orient Semiconductor Electronics, Limited (TWSE:2329) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Orient Semiconductor Electronics

What Is Orient Semiconductor Electronics's Debt?

You can click the graphic below for the historical numbers, but it shows that Orient Semiconductor Electronics had NT$1.28b of debt in June 2024, down from NT$2.15b, one year before. But it also has NT$5.37b in cash to offset that, meaning it has NT$4.10b net cash.

How Healthy Is Orient Semiconductor Electronics' Balance Sheet?

We can see from the most recent balance sheet that Orient Semiconductor Electronics had liabilities of NT$7.98b falling due within a year, and liabilities of NT$1.21b due beyond that. Offsetting these obligations, it had cash of NT$5.37b as well as receivables valued at NT$4.68b due within 12 months. So it actually has NT$861.7m more liquid assets than total liabilities.

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

Even more impressive was the fact that Orient Semiconductor Electronics grew its EBIT by 105% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Orient Semiconductor Electronics'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Orient Semiconductor Electronics 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. Over the last three years, Orient Semiconductor Electronics actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Orient Semiconductor Electronics has net cash of NT$4.10b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$3.1b, being 105% of its EBIT. So is Orient Semiconductor Electronics's debt a risk? It doesn't seem so to us. 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. Be aware that Orient Semiconductor Electronics is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.