Is RichWave Technology (TWSE:4968) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 RichWave Technology Corporation (TWSE:4968) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for RichWave Technology

What Is RichWave Technology's Net Debt?

The image below, which you can click on for greater detail, shows that RichWave Technology had debt of NT$226.5m at the end of September 2024, a reduction from NT$252.4m over a year. But on the other hand it also has NT$957.0m in cash, leading to a NT$730.6m net cash position.

How Healthy Is RichWave Technology's Balance Sheet?

We can see from the most recent balance sheet that RichWave Technology had liabilities of NT$1.00b falling due within a year, and liabilities of NT$98.9m due beyond that. Offsetting this, it had NT$957.0m in cash and NT$1.23b in receivables that were due within 12 months. So it actually has NT$1.09b more liquid assets than total liabilities.

This surplus suggests that RichWave Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, RichWave Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, RichWave Technology turned things around in the last 12 months, delivering and EBIT of NT$67m. 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 RichWave Technology'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. While RichWave Technology 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. Happily for any shareholders, RichWave Technology actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case RichWave Technology has NT$730.6m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$84m, being 125% of its EBIT. So we don't think RichWave Technology's use of debt is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with RichWave Technology .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.