Visual Photonics Epitaxy (TWSE:2455) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Visual Photonics Epitaxy Co., Ltd. (TWSE:2455) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Visual Photonics Epitaxy

What Is Visual Photonics Epitaxy's Net Debt?

As you can see below, Visual Photonics Epitaxy had NT$800.0m of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have NT$825.8m in cash offsetting this, leading to net cash of NT$25.8m.

How Strong Is Visual Photonics Epitaxy's Balance Sheet?

According to the last reported balance sheet, Visual Photonics Epitaxy had liabilities of NT$799.2m due within 12 months, and liabilities of NT$709.2m due beyond 12 months. Offsetting these obligations, it had cash of NT$825.8m as well as receivables valued at NT$622.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$59.6m.

Having regard to Visual Photonics Epitaxy's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the NT$30.2b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Visual Photonics Epitaxy boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Visual Photonics Epitaxy saw its EBIT drop by 6.5% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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 Visual Photonics Epitaxy 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.

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 66% 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 it is always sensible to look at a company's total liabilities, it is very reassuring that Visual Photonics Epitaxy has NT$25.8m in net cash. So we don't have any problem with Visual Photonics Epitaxy's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 Visual Photonics Epitaxy 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.