Is Elite Semiconductor Microelectronics Technology (TWSE:3006) Weighed On By Its Debt Load?

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. Importantly, Elite Semiconductor Microelectronics Technology Inc. (TWSE:3006) does carry debt. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Elite Semiconductor Microelectronics Technology's Net Debt?

As you can see below, Elite Semiconductor Microelectronics Technology had NT$3.61b of debt at December 2024, down from NT$4.21b a year prior. But it also has NT$4.49b in cash to offset that, meaning it has NT$875.2m net cash.

How Strong Is Elite Semiconductor Microelectronics Technology's Balance Sheet?

The latest balance sheet data shows that Elite Semiconductor Microelectronics Technology had liabilities of NT$5.04b due within a year, and liabilities of NT$2.34b falling due after that. Offsetting this, it had NT$4.49b in cash and NT$1.55b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$1.34b.

Given Elite Semiconductor Microelectronics Technology has a market capitalization of NT$15.3b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

View our latest analysis for Elite Semiconductor Microelectronics Technology

Over 12 months, Elite Semiconductor Microelectronics Technology reported revenue of NT$13b, which is a gain of 13%, 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?

While Elite Semiconductor Microelectronics Technology lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of NT$505m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Elite Semiconductor Microelectronics Technology (1 is a bit unpleasant) you should be aware of.

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.