Ichia Technologies (TPE:2402) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, '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. We note that Ichia Technologies, Inc. (TPE:2402) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Ichia Technologies

What Is Ichia Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Ichia Technologies had NT$1.39b of debt, an increase on NT$1.21b, over one year. However, it does have NT$1.79b in cash offsetting this, leading to net cash of NT$401.4m.

A Look At Ichia Technologies's Liabilities

The latest balance sheet data shows that Ichia Technologies had liabilities of NT$2.89b due within a year, and liabilities of NT$176.6m falling due after that. Offsetting this, it had NT$1.79b in cash and NT$1.98b in receivables that were due within 12 months. So it actually has NT$703.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Ichia Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Ichia Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Ichia Technologies's load is not too heavy, because its EBIT was down 34% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Ichia Technologies'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Ichia Technologies 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. Over the last two years, Ichia Technologies actually produced more free cash flow than EBIT. 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 Ichia Technologies has NT$401.4m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$667m, being 283% of its EBIT. So we don't have any problem with Ichia Technologies's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Ichia Technologies is showing 2 warning signs in our investment analysis , you should know about...

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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