Is Elite Semiconductor Microelectronics Technology (TWSE:3006) Using Too Much Debt?

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 Elite Semiconductor Microelectronics Technology Inc. (TWSE:3006) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Elite Semiconductor Microelectronics Technology

What Is Elite Semiconductor Microelectronics Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Elite Semiconductor Microelectronics Technology had NT$3.41b of debt in June 2024, down from NT$4.08b, one year before. But it also has NT$4.31b in cash to offset that, meaning it has NT$903.1m net cash.

A Look At Elite Semiconductor Microelectronics Technology's Liabilities

The latest balance sheet data shows that Elite Semiconductor Microelectronics Technology had liabilities of NT$5.79b due within a year, and liabilities of NT$2.05b falling due after that. Offsetting these obligations, it had cash of NT$4.31b as well as receivables valued at NT$1.83b due within 12 months. So its liabilities total NT$1.71b more than the combination of its cash and short-term receivables.

Given Elite Semiconductor Microelectronics Technology has a market capitalization of NT$18.9b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Elite Semiconductor Microelectronics Technology also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Elite Semiconductor Microelectronics Technology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Elite Semiconductor Microelectronics Technology reported revenue of NT$13b, which is a gain of 10%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Elite Semiconductor Microelectronics Technology?

Although Elite Semiconductor Microelectronics Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of NT$384m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. Be aware that Elite Semiconductor Microelectronics Technology 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.