ELAN Microelectronics (TWSE:2458) Has A Rock Solid Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that ELAN Microelectronics Corporation (TWSE:2458) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for ELAN Microelectronics

What Is ELAN Microelectronics's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 ELAN Microelectronics had debt of NT$608.6m, up from NT$508.6m in one year. However, it does have NT$4.82b in cash offsetting this, leading to net cash of NT$4.21b.

How Healthy Is ELAN Microelectronics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ELAN Microelectronics had liabilities of NT$4.56b due within 12 months and liabilities of NT$1.43b due beyond that. Offsetting this, it had NT$4.82b in cash and NT$2.44b in receivables that were due within 12 months. So it actually has NT$1.26b more liquid assets than total liabilities.

This surplus suggests that ELAN Microelectronics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, ELAN Microelectronics boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that ELAN Microelectronics has boosted its EBIT by 78%, thus reducing the spectre of future debt repayments. 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 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. 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. Over the most recent three years, ELAN Microelectronics recorded free cash flow worth 71% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case ELAN Microelectronics has NT$4.21b in net cash and a decent-looking balance sheet. And we liked the look of last year's 78% year-on-year EBIT growth. So is ELAN Microelectronics'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 ELAN Microelectronics .

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.