Lite-On Technology (TPE:2301) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Lite-On Technology Corporation (TPE:2301) makes use of debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. 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.

Check out our latest analysis for Lite-On Technology

What Is Lite-On Technology's Debt?

As you can see below, Lite-On Technology had NT$24.9b of debt at December 2020, down from NT$30.4b a year prior. However, it does have NT$68.6b in cash offsetting this, leading to net cash of NT$43.7b.

How Strong Is Lite-On Technology's Balance Sheet?

According to the last reported balance sheet, Lite-On Technology had liabilities of NT$99.6b due within 12 months, and liabilities of NT$2.33b due beyond 12 months. Offsetting these obligations, it had cash of NT$68.6b as well as receivables valued at NT$40.9b due within 12 months. So it can boast NT$7.57b more liquid assets than total liabilities.

This short term liquidity is a sign that Lite-On Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Lite-On Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Lite-On Technology grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Lite-On Technology'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Lite-On Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Lite-On Technology actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Lite-On Technology has net cash of NT$43.7b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$14b, being 133% of its EBIT. So we don't think Lite-On Technology's use of debt is risky. 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 Lite-On Technology you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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