Does KYE Systems (TPE:2365) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, KYE Systems Corp. (TPE:2365) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for KYE Systems

What Is KYE Systems's Debt?

You can click the graphic below for the historical numbers, but it shows that KYE Systems had NT$238.0m of debt in September 2020, down from NT$963.4m, one year before. But on the other hand it also has NT$1.48b in cash, leading to a NT$1.24b net cash position.

How Strong Is KYE Systems' Balance Sheet?

We can see from the most recent balance sheet that KYE Systems had liabilities of NT$416.5m falling due within a year, and liabilities of NT$333.4m due beyond that. Offsetting this, it had NT$1.48b in cash and NT$195.8m in receivables that were due within 12 months. So it can boast NT$925.9m more liquid assets than total liabilities.

This surplus strongly suggests that KYE Systems has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, KYE Systems boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that KYE Systems grew its EBIT by 357% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is KYE Systems's earnings that will influence how the balance sheet holds up in the future. 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 KYE Systems 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. Happily for any shareholders, KYE Systems actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that KYE Systems has net cash of NT$1.24b, as well as more liquid assets than liabilities. The cherry on top was that in converted 269% of that EBIT to free cash flow, bringing in NT$285m. When it comes to KYE Systems's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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 instance, we've identified 2 warning signs for KYE Systems that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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