Does ELAN Microelectronics (TWSE:2458) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies ELAN Microelectronics Corporation (TWSE:2458) makes use of debt. But is this debt a concern to shareholders?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for ELAN Microelectronics

How Much Debt Does ELAN Microelectronics Carry?

As you can see below, at the end of March 2024, ELAN Microelectronics had NT$510.6m of debt, up from NT$80.0m a year ago. Click the image for more detail. But it also has NT$5.02b in cash to offset that, meaning it has NT$4.51b net cash.

How Strong Is ELAN Microelectronics' Balance Sheet?

We can see from the most recent balance sheet that ELAN Microelectronics had liabilities of NT$4.40b falling due within a year, and liabilities of NT$1.47b due beyond that. Offsetting these obligations, it had cash of NT$5.02b as well as receivables valued at NT$2.20b due within 12 months. So it actually has NT$1.35b more liquid assets than total liabilities.

This short term liquidity is a sign that ELAN Microelectronics could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, ELAN Microelectronics boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, ELAN Microelectronics grew its EBIT by 52% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ELAN Microelectronics 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. ELAN Microelectronics 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, ELAN Microelectronics produced sturdy free cash flow equating to 76% 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 investigate a company's debt, in this case ELAN Microelectronics has NT$4.51b in net cash and a decent-looking balance sheet. And we liked the look of last year's 52% year-on-year EBIT growth. So we don't think ELAN Microelectronics's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that ELAN Microelectronics is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com