Raydium Semiconductor (TWSE:3592) Could Easily Take On More 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 Raydium Semiconductor Corporation (TWSE:3592) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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.

View our latest analysis for Raydium Semiconductor

What Is Raydium Semiconductor's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Raydium Semiconductor had NT$1.06b of debt, an increase on NT$63.3m, over one year. But on the other hand it also has NT$10.1b in cash, leading to a NT$9.09b net cash position.

A Look At Raydium Semiconductor's Liabilities

We can see from the most recent balance sheet that Raydium Semiconductor had liabilities of NT$9.94b falling due within a year, and liabilities of NT$737.3m due beyond that. Offsetting these obligations, it had cash of NT$10.1b as well as receivables valued at NT$6.98b due within 12 months. So it actually has NT$6.45b more liquid assets than total liabilities.

This surplus suggests that Raydium Semiconductor is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Raydium Semiconductor has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Raydium Semiconductor grew its EBIT by 48% over the last twelve months, and that growth will make it easier to handle its debt. 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 Raydium Semiconductor'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, a company can only pay off debt with cold hard cash, not accounting profits. While Raydium Semiconductor has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Raydium Semiconductor recorded free cash flow worth a fulsome 98% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Raydium Semiconductor has net cash of NT$9.09b, as well as more liquid assets than liabilities. The cherry on top was that in converted 98% of that EBIT to free cash flow, bringing in NT$2.0b. When it comes to Raydium Semiconductor's debt, we sufficiently relaxed that our mind turns to the jacuzzi. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Raydium Semiconductor that 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.

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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.