Micro-Star International (TPE:2377) Could Easily Take On More Debt

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Micro-Star International Co., Ltd. (TPE:2377) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 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, 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.

View our latest analysis for Micro-Star International

What Is Micro-Star International's Debt?

As you can see below, Micro-Star International had NT$3.00b of debt at September 2020, down from NT$3.52b a year prior. However, its balance sheet shows it holds NT$18.6b in cash, so it actually has NT$15.6b net cash.

A Look At Micro-Star International's Liabilities

According to the last reported balance sheet, Micro-Star International had liabilities of NT$41.5b due within 12 months, and liabilities of NT$682.3m due beyond 12 months. Offsetting these obligations, it had cash of NT$18.6b as well as receivables valued at NT$23.2b due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Micro-Star International's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the NT$115.7b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Micro-Star International 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 Micro-Star International has boosted its EBIT by 56%, 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 Micro-Star International's ability to maintain a healthy balance sheet going forward. 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. While Micro-Star International 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. During the last three years, Micro-Star International generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Micro-Star International has NT$15.6b in net cash. And it impressed us with free cash flow of NT$12b, being 89% of its EBIT. So we don't think Micro-Star International's use of debt is risky. 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. Be aware that Micro-Star International is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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