We Think Everlight Electronics (TWSE:2393) Can Manage Its Debt With Ease

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.' 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. Importantly, Everlight Electronics Co., Ltd. (TWSE:2393) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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 Everlight Electronics

What Is Everlight Electronics's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Everlight Electronics had debt of NT$757.4m, up from NT$8.63m in one year. But on the other hand it also has NT$10.9b in cash, leading to a NT$10.1b net cash position.

How Healthy Is Everlight Electronics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Everlight Electronics had liabilities of NT$8.95b due within 12 months and liabilities of NT$978.3m due beyond that. On the other hand, it had cash of NT$10.9b and NT$6.48b worth of receivables due within a year. So it can boast NT$7.42b more liquid assets than total liabilities.

This surplus suggests that Everlight Electronics is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Everlight Electronics boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Everlight Electronics grew its EBIT by 49% over the last twelve months, and that growth will make it easier to handle its debt. 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 Everlight Electronics can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Everlight Electronics 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. Happily for any shareholders, Everlight Electronics actually produced more free cash flow than EBIT over the last three years. 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 it is always sensible to investigate a company's debt, in this case Everlight Electronics has NT$10.1b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$2.1b, being 141% of its EBIT. The bottom line is that we do not find Everlight Electronics's debt levels at all concerning. 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 1 warning sign for Everlight Electronics you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.