Is Visual Photonics Epitaxy (TWSE:2455) A Risky Investment?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Visual Photonics Epitaxy Co., Ltd. (TWSE:2455) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Visual Photonics Epitaxy

What Is Visual Photonics Epitaxy's Debt?

The image below, which you can click on for greater detail, shows that Visual Photonics Epitaxy had debt of NT$700.0m at the end of March 2024, a reduction from NT$790.0m over a year. However, it does have NT$1.05b in cash offsetting this, leading to net cash of NT$353.2m.

How Strong Is Visual Photonics Epitaxy's Balance Sheet?

According to the last reported balance sheet, Visual Photonics Epitaxy had liabilities of NT$820.9m due within 12 months, and liabilities of NT$608.3m due beyond 12 months. On the other hand, it had cash of NT$1.05b and NT$551.9m worth of receivables due within a year. So it can boast NT$175.8m more liquid assets than total liabilities.

This state of affairs indicates that Visual Photonics Epitaxy's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the NT$30.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Visual Photonics Epitaxy boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Visual Photonics Epitaxy grew its EBIT by 102% last year, which is an impressive improvement. 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 ultimately the future profitability of the business will decide if Visual Photonics Epitaxy 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Visual Photonics Epitaxy 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. During the last three years, Visual Photonics Epitaxy produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Visual Photonics Epitaxy has net cash of NT$353.2m, as well as more liquid assets than liabilities. And we liked the look of last year's 102% year-on-year EBIT growth. So we don't think Visual Photonics Epitaxy's use of debt is risky. 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 instance, we've identified 1 warning sign for Visual Photonics Epitaxy that you should be aware of.

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.

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