Elite Advanced Laser (TWSE:3450) Has A Pretty Healthy 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Elite Advanced Laser Corporation (TWSE:3450) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Elite Advanced Laser

How Much Debt Does Elite Advanced Laser Carry?

As you can see below, Elite Advanced Laser had NT$235.0m of debt at June 2024, down from NT$370.0m a year prior. But it also has NT$2.36b in cash to offset that, meaning it has NT$2.13b net cash.

How Strong Is Elite Advanced Laser's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Elite Advanced Laser had liabilities of NT$2.12b due within 12 months and liabilities of NT$1.06b due beyond that. Offsetting this, it had NT$2.36b in cash and NT$1.55b in receivables that were due within 12 months. So it can boast NT$725.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Elite Advanced Laser could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Elite Advanced Laser has more cash than debt is arguably a good indication that it can manage its debt safely.

While Elite Advanced Laser doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. There's no doubt that we learn most about debt from the balance sheet. But it is Elite Advanced Laser's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Elite Advanced Laser 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, Elite Advanced Laser recorded free cash flow worth 55% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 Elite Advanced Laser has NT$2.13b in net cash and a decent-looking balance sheet. So we don't have any problem with Elite Advanced Laser's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Elite Advanced Laser that you should be aware of before investing here.

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.

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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.