Health Check: How Prudently Does Microtek International (TPE:2305) Use Debt?

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. We can see that Microtek International, Inc. (TPE:2305) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Microtek International

What Is Microtek International's Net Debt?

As you can see below, Microtek International had NT$102.0m of debt at September 2020, down from NT$111.0m a year prior. But on the other hand it also has NT$1.17b in cash, leading to a NT$1.07b net cash position.

How Healthy Is Microtek International's Balance Sheet?

According to the last reported balance sheet, Microtek International had liabilities of NT$313.8m due within 12 months, and liabilities of NT$380.2m due beyond 12 months. Offsetting this, it had NT$1.17b in cash and NT$56.9m in receivables that were due within 12 months. So it actually has NT$532.4m more liquid assets than total liabilities.

This excess liquidity suggests that Microtek International is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Microtek International boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Microtek International will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Microtek International wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to NT$559m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Microtek International?

Although Microtek International had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of NT$33m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Microtek International (1 is significant!) that you should be aware of before investing here.

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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