Is Orient Semiconductor Electronics (TWSE:2329) 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. Importantly, Orient Semiconductor Electronics, Limited (TWSE:2329) does carry debt. But is this debt a concern to shareholders?

The end of cancer? These 15 emerging AI stocks are developing tech that will allow early identification of life changing diseases like cancer and Alzheimer's.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Orient Semiconductor Electronics Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Orient Semiconductor Electronics had NT$1.38b of debt, an increase on NT$1.24b, over one year. However, its balance sheet shows it holds NT$4.45b in cash, so it actually has NT$3.06b net cash.

How Strong Is Orient Semiconductor Electronics' Balance Sheet?

According to the last reported balance sheet, Orient Semiconductor Electronics had liabilities of NT$6.81b due within 12 months, and liabilities of NT$1.15b due beyond 12 months. On the other hand, it had cash of NT$4.45b and NT$4.56b worth of receivables due within a year. So it actually has NT$1.04b more liquid assets than total liabilities.

This surplus suggests that Orient Semiconductor Electronics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Orient Semiconductor Electronics boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Orient Semiconductor Electronics

In fact Orient Semiconductor Electronics's saving grace is its low debt levels, because its EBIT has tanked 44% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 recorded free cash flow worth a fulsome 99% 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 Orient Semiconductor Electronics has NT$3.06b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$1.3b, being 99% of its EBIT. So we are not troubled with Orient Semiconductor Electronics's debt use. 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. Case in point: We've spotted 2 warning signs for Orient Semiconductor Electronics you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.