Is Min Aik Technology (TPE:3060) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Min Aik Technology Co., Ltd. (TPE:3060) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Min Aik Technology

What Is Min Aik Technology's Net Debt?

As you can see below, Min Aik Technology had NT$664.8m of debt at September 2020, down from NT$702.2m a year prior. However, its balance sheet shows it holds NT$837.3m in cash, so it actually has NT$172.5m net cash.

How Healthy Is Min Aik Technology's Balance Sheet?

We can see from the most recent balance sheet that Min Aik Technology had liabilities of NT$1.46b falling due within a year, and liabilities of NT$329.3m due beyond that. Offsetting these obligations, it had cash of NT$837.3m as well as receivables valued at NT$798.9m due within 12 months. So it has liabilities totalling NT$151.9m more than its cash and near-term receivables, combined.

Given Min Aik Technology has a market capitalization of NT$2.02b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Min Aik Technology boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Min Aik Technology will need earnings to service that debt. 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.

In the last year Min Aik Technology had a loss before interest and tax, and actually shrunk its revenue by 24%, to NT$4.3b. That makes us nervous, to say the least.

So How Risky Is Min Aik Technology?

Although Min Aik Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of NT$487m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Min Aik Technology (of which 1 shouldn't be ignored!) you should know about.

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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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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