Here's Why HY Electronic (Cayman) (TWSE:6573) Can Afford Some Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, HY Electronic (Cayman) Limited (TWSE:6573) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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 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 HY Electronic (Cayman)

What Is HY Electronic (Cayman)'s Net Debt?

As you can see below, HY Electronic (Cayman) had NT$642.1m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of NT$105.6m, its net debt is less, at about NT$536.5m.

A Look At HY Electronic (Cayman)'s Liabilities

We can see from the most recent balance sheet that HY Electronic (Cayman) had liabilities of NT$995.1m falling due within a year, and liabilities of NT$411.4m due beyond that. On the other hand, it had cash of NT$105.6m and NT$325.7m worth of receivables due within a year. So it has liabilities totalling NT$975.2m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of NT$1.43b, so it does suggest shareholders should keep an eye on HY Electronic (Cayman)'s use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 HY Electronic (Cayman) 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.

Over 12 months, HY Electronic (Cayman) made a loss at the EBIT level, and saw its revenue drop to NT$1.1b, which is a fall of 4.0%. That's not what we would hope to see.

Caveat Emptor

Importantly, HY Electronic (Cayman) had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping NT$194m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of NT$251m into a profit. So we do think this stock is quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for HY Electronic (Cayman) (of which 1 can't be ignored!) you should know about.

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.