Health Check: How Prudently Does Microelectronics Technology (TPE:2314) Use Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Microelectronics Technology Inc. (TPE:2314) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Microelectronics Technology

What Is Microelectronics Technology's Debt?

As you can see below, at the end of September 2020, Microelectronics Technology had NT$737.1m of debt, up from NT$436.5m a year ago. Click the image for more detail. But it also has NT$1.20b in cash to offset that, meaning it has NT$459.5m net cash.

A Look At Microelectronics Technology's Liabilities

We can see from the most recent balance sheet that Microelectronics Technology had liabilities of NT$1.58b falling due within a year, and liabilities of NT$892.2m due beyond that. Offsetting these obligations, it had cash of NT$1.20b as well as receivables valued at NT$983.0m due within 12 months. So it has liabilities totalling NT$287.9m more than its cash and near-term receivables, combined.

Given Microelectronics Technology has a market capitalization of NT$7.94b, 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, Microelectronics Technology also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Microelectronics Technology'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.

In the last year Microelectronics Technology had a loss before interest and tax, and actually shrunk its revenue by 33%, to NT$4.4b. To be frank that doesn't bode well.

So How Risky Is Microelectronics Technology?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Microelectronics Technology lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through NT$115m of cash and made a loss of NT$32m. Given it only has net cash of NT$459.5m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. To that end, you should be aware of the 1 warning sign we've spotted with Microelectronics Technology .

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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