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

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Visual Photonics Epitaxy Co., Ltd. (TWSE:2455) makes use of debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Visual Photonics Epitaxy

How Much Debt Does Visual Photonics Epitaxy Carry?

You can click the graphic below for the historical numbers, but it shows that Visual Photonics Epitaxy had NT$500.0m of debt in September 2024, down from NT$900.0m, one year before. However, it does have NT$946.9m in cash offsetting this, leading to net cash of NT$446.9m.

A Look At Visual Photonics Epitaxy's Liabilities

The latest balance sheet data shows that Visual Photonics Epitaxy had liabilities of NT$754.8m due within a year, and liabilities of NT$506.7m falling due after that. Offsetting these obligations, it had cash of NT$946.9m as well as receivables valued at NT$406.3m due within 12 months. So it actually has NT$91.7m 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$27.0b 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 161% 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'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. While Visual Photonics Epitaxy 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. During the last three years, Visual Photonics Epitaxy generated free cash flow amounting to a very robust 92% of its EBIT, more than we'd 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 Visual Photonics Epitaxy has NT$446.9m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 92% of that EBIT to free cash flow, bringing in NT$1.1b. 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. However, not all investment risk resides within the balance sheet - far from it. Be aware that Visual Photonics Epitaxy is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.