Is Elitegroup Computer SystemsLtd (TPE:2331) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Elitegroup Computer Systems Co.,Ltd. (TPE:2331) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Elitegroup Computer SystemsLtd

What Is Elitegroup Computer SystemsLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Elitegroup Computer SystemsLtd had NT$1.28b of debt in September 2020, down from NT$1.55b, one year before. However, it does have NT$8.96b in cash offsetting this, leading to net cash of NT$7.68b.

How Healthy Is Elitegroup Computer SystemsLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Elitegroup Computer SystemsLtd had liabilities of NT$11.9b due within 12 months and liabilities of NT$852.3m due beyond that. On the other hand, it had cash of NT$8.96b and NT$3.74b worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Elitegroup Computer SystemsLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the NT$16.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Elitegroup Computer SystemsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Elitegroup Computer SystemsLtd turned things around in the last 12 months, delivering and EBIT of NT$379m. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Elitegroup Computer SystemsLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Elitegroup Computer SystemsLtd 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 year, Elitegroup Computer SystemsLtd reported free cash flow worth 7.5% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Elitegroup Computer SystemsLtd has NT$7.68b in net cash. So we are not troubled with Elitegroup Computer SystemsLtd's debt use. 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 learn about the 3 warning signs we've spotted with Elitegroup Computer SystemsLtd (including 1 which is a bit concerning) .

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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