Is Powerchip Semiconductor Manufacturing (TWSE:6770) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Powerchip Semiconductor Manufacturing

What Is Powerchip Semiconductor Manufacturing's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Powerchip Semiconductor Manufacturing had debt of NT$48.5b, up from NT$21.1b in one year. However, it also had NT$41.5b in cash, and so its net debt is NT$7.00b.

How Strong 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$33.6b due within 12 months and liabilities of NT$61.4b due beyond that. Offsetting these obligations, it had cash of NT$41.5b as well as receivables valued at NT$7.00b due within 12 months. So it has liabilities totalling NT$46.5b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Powerchip Semiconductor Manufacturing has a market capitalization of NT$94.3b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Powerchip Semiconductor Manufacturing'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.

In the last year Powerchip Semiconductor Manufacturing had a loss before interest and tax, and actually shrunk its revenue by 42%, to NT$44b. That makes us nervous, to say the least.

Caveat Emptor

While Powerchip Semiconductor Manufacturing's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at NT$3.1b. 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. However, it doesn't help that it burned through NT$47b 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. Case in point: We've spotted 1 warning sign for Powerchip Semiconductor Manufacturing you should be aware of.

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.