Delta Electronics (TPE:2308) Has A Rock Solid Balance Sheet

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.' 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. We note that Delta Electronics, Inc. (TPE:2308) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

Check out our latest analysis for Delta Electronics

How Much Debt Does Delta Electronics Carry?

As you can see below, Delta Electronics had NT$47.4b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has NT$52.5b in cash, leading to a NT$5.10b net cash position.

A Look At Delta Electronics's Liabilities

The latest balance sheet data shows that Delta Electronics had liabilities of NT$87.1b due within a year, and liabilities of NT$68.2b falling due after that. Offsetting this, it had NT$52.5b in cash and NT$67.2b in receivables that were due within 12 months. So it has liabilities totalling NT$35.5b more than its cash and near-term receivables, combined.

Given Delta Electronics has a humongous market capitalization of NT$644.2b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Delta Electronics also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Delta Electronics has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. 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 Delta Electronics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Delta Electronics 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. During the last three years, Delta Electronics generated free cash flow amounting to a very robust 96% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

We could understand if investors are concerned about Delta Electronics's liabilities, but we can be reassured by the fact it has has net cash of NT$5.10b. The cherry on top was that in converted 96% of that EBIT to free cash flow, bringing in NT$28b. So we don't think Delta Electronics's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Delta Electronics that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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