Is Powerchip Semiconductor Manufacturing (TWSE:6770) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Powerchip Semiconductor Manufacturing Corp. (TWSE:6770) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Powerchip Semiconductor Manufacturing Carry?

As you can see below, at the end of December 2024, Powerchip Semiconductor Manufacturing had NT$62.7b of debt, up from NT$48.5b a year ago. Click the image for more detail. However, it does have NT$31.2b in cash offsetting this, leading to net debt of about NT$31.6b.

How Healthy Is Powerchip Semiconductor Manufacturing's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Powerchip Semiconductor Manufacturing had liabilities of NT$30.4b due within 12 months and liabilities of NT$69.9b due beyond that. On the other hand, it had cash of NT$31.2b and NT$7.30b worth of receivables due within a year. So it has liabilities totalling NT$61.8b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of NT$63.4b, so it does suggest shareholders should keep an eye on Powerchip Semiconductor Manufacturing's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Powerchip Semiconductor Manufacturing can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

View our latest analysis for Powerchip Semiconductor Manufacturing

Over 12 months, Powerchip Semiconductor Manufacturing saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Powerchip Semiconductor Manufacturing produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping NT$7.5b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through NT$17b of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Powerchip Semiconductor Manufacturing has 1 warning sign we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.