Giga-Byte Technology (TPE:2376) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Giga-Byte Technology Co., Ltd. (TPE:2376) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Giga-Byte Technology

What Is Giga-Byte Technology's Net Debt?

As you can see below, at the end of September 2020, Giga-Byte Technology had NT$611.1m of debt, up from NT$418.5m a year ago. Click the image for more detail. But on the other hand it also has NT$17.2b in cash, leading to a NT$16.6b net cash position.

How Strong Is Giga-Byte Technology's Balance Sheet?

The latest balance sheet data shows that Giga-Byte Technology had liabilities of NT$23.2b due within a year, and liabilities of NT$921.4m falling due after that. Offsetting these obligations, it had cash of NT$17.2b as well as receivables valued at NT$9.37b due within 12 months. So it can boast NT$2.43b more liquid assets than total liabilities.

This surplus suggests that Giga-Byte Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Giga-Byte Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Giga-Byte Technology grew its EBIT by 224% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Giga-Byte Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Giga-Byte Technology 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. Happily for any shareholders, Giga-Byte Technology actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case Giga-Byte Technology has NT$16.6b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 115% of that EBIT to free cash flow, bringing in NT$7.7b. So is Giga-Byte Technology's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Giga-Byte Technology has 1 warning sign we think you should be aware of.

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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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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