Visual Photonics Epitaxy (TWSE:2455) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, '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 can see that Visual Photonics Epitaxy Co., Ltd. (TWSE:2455) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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$600.0m at the end of June 2024, a reduction from NT$700.0m over a year. However, it does have NT$1.29b in cash offsetting this, leading to net cash of NT$694.8m.

How Strong Is Visual Photonics Epitaxy's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Visual Photonics Epitaxy had liabilities of NT$1.28b due within 12 months and liabilities of NT$507.5m due beyond that. Offsetting this, it had NT$1.29b in cash and NT$456.7m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

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$28.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Visual Photonics Epitaxy also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Visual Photonics Epitaxy grew its EBIT by 199% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about Visual Photonics Epitaxy's liabilities, but we can be reassured by the fact it has has net cash of NT$694.8m. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in NT$935m. So is Visual Photonics Epitaxy's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Visual Photonics Epitaxy .

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.