Elite Advanced Laser (TWSE:3450) Seems To Use Debt Rather Sparingly

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.' 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. As with many other companies Elite Advanced Laser Corporation (TWSE:3450) makes use of debt. But should shareholders be worried about its use of debt?

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 Elite Advanced Laser

How Much Debt Does Elite Advanced Laser Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Elite Advanced Laser had NT$295.0m of debt, an increase on NT$105.0m, over one year. However, it does have NT$2.69b in cash offsetting this, leading to net cash of NT$2.40b.

A Look At Elite Advanced Laser's Liabilities

Zooming in on the latest balance sheet data, we can see that Elite Advanced Laser had liabilities of NT$2.40b due within 12 months and liabilities of NT$1.10b due beyond that. Offsetting this, it had NT$2.69b in cash and NT$1.84b in receivables that were due within 12 months. So it can boast NT$1.03b more liquid assets than total liabilities.

This surplus suggests that Elite Advanced Laser has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

Better yet, Elite Advanced Laser grew its EBIT by 224% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Elite Advanced Laser's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 last three years, Elite Advanced Laser recorded free cash flow worth a fulsome 94% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Elite Advanced Laser has NT$2.40b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 94% of that EBIT to free cash flow, bringing in NT$1.0b. So is Elite Advanced Laser's debt a risk? It doesn't seem so to us. 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 example - Elite Advanced Laser has 1 warning sign we think you should be aware of.

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.

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.