The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Delta Electronics, Inc. (TPE:2308) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Delta Electronics's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 Delta Electronics had NT$41.4b of debt, an increase on NT$35.4b, over one year. But it also has NT$59.5b in cash to offset that, meaning it has NT$18.1b net cash.
A Look At Delta Electronics' Liabilities
Zooming in on the latest balance sheet data, we can see that Delta Electronics had liabilities of NT$94.0b due within 12 months and liabilities of NT$63.8b due beyond that. Offsetting these obligations, it had cash of NT$59.5b as well as receivables valued at NT$67.3b due within 12 months. So it has liabilities totalling NT$31.1b more than its cash and near-term receivables, combined.
Of course, Delta Electronics has a titanic market capitalization of NT$748.1b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 63%, 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Delta Electronics 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. Over the last three years, Delta Electronics actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
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$18.1b. The cherry on top was that in converted 102% of that EBIT to free cash flow, bringing in NT$28b. So we don't think Delta Electronics's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Delta Electronics, you may well want to click here to check an interactive graph of its earnings per share history.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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Delta Electronics, Inc., together with its subsidiaries, provides power and thermal management solutions in Mainland China, the United States, Taiwan, Thailand, and internationally.
Flawless balance sheet with reasonable growth potential.
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