Is VisEra Technologies (TWSE:6789) Using Too Much 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.' 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. We can see that VisEra Technologies Company Ltd. (TWSE:6789) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 VisEra Technologies

How Much Debt Does VisEra Technologies Carry?

The image below, which you can click on for greater detail, shows that VisEra Technologies had debt of NT$6.17b at the end of March 2024, a reduction from NT$8.09b over a year. But it also has NT$12.4b in cash to offset that, meaning it has NT$6.21b net cash.

A Look At VisEra Technologies' Liabilities

The latest balance sheet data shows that VisEra Technologies had liabilities of NT$3.94b due within a year, and liabilities of NT$3.86b falling due after that. Offsetting this, it had NT$12.4b in cash and NT$1.62b in receivables that were due within 12 months. So it can boast NT$6.20b more liquid assets than total liabilities.

This surplus suggests that VisEra Technologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that VisEra Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for VisEra Technologies if management cannot prevent a repeat of the 74% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 VisEra Technologies'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. VisEra Technologies may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, VisEra Technologies's free cash flow amounted to 38% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that VisEra Technologies has net cash of NT$6.21b, as well as more liquid assets than liabilities. So we don't have any problem with VisEra Technologies's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for VisEra Technologies you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.