Emerging Display Technologies (TPE:3038) Has A Rock Solid 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, Emerging Display Technologies Corp. (TPE:3038) does carry debt. But the real question is whether this debt is making the company risky.

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 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 Emerging Display Technologies

What Is Emerging Display Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Emerging Display Technologies had NT$1.01b of debt, an increase on NT$709.4m, over one year. However, its balance sheet shows it holds NT$1.74b in cash, so it actually has NT$736.6m net cash.

How Strong Is Emerging Display Technologies's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Emerging Display Technologies had liabilities of NT$1.80b due within 12 months and liabilities of NT$151.1m due beyond that. On the other hand, it had cash of NT$1.74b and NT$623.2m worth of receivables due within a year. So it can boast NT$410.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Emerging Display Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Emerging Display Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Emerging Display Technologies grew its EBIT by 53% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Emerging Display Technologies's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Emerging Display Technologies 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 three years, Emerging Display Technologies recorded free cash flow worth a fulsome 96% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Emerging Display Technologies has net cash of NT$736.6m, as well as more liquid assets than liabilities. The cherry on top was that in converted 96% of that EBIT to free cash flow, bringing in NT$296m. So we don't think Emerging Display Technologies's use of debt is risky. 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 example, we've discovered 3 warning signs for Emerging Display Technologies that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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