Does Mildex Optical (GTSM:4729) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Mildex Optical Inc. (GTSM:4729) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Mildex Optical

What Is Mildex Optical's Debt?

The chart below, which you can click on for greater detail, shows that Mildex Optical had NT$1.70b in debt in December 2020; about the same as the year before. However, it also had NT$303.0m in cash, and so its net debt is NT$1.39b.

How Strong Is Mildex Optical's Balance Sheet?

According to the last reported balance sheet, Mildex Optical had liabilities of NT$1.11b due within 12 months, and liabilities of NT$928.3m due beyond 12 months. Offsetting these obligations, it had cash of NT$303.0m as well as receivables valued at NT$184.0m due within 12 months. So its liabilities total NT$1.55b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of NT$1.70b, so it does suggest shareholders should keep an eye on Mildex Optical'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 it is Mildex Optical's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Mildex Optical had a loss before interest and tax, and actually shrunk its revenue by 11%, to NT$913m. That's not what we would hope to see.

Caveat Emptor

Not only did Mildex Optical's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost NT$128m at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of NT$114m into a profit. So we do think this stock is quite risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Mildex Optical (of which 2 are significant!) you should know about.

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. 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.
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