Is Min Aik Technology (TPE:3060) Weighed On By Its Debt Load?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Min Aik Technology Co., Ltd. (TPE:3060) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Min Aik Technology

What Is Min Aik Technology's Debt?

The image below, which you can click on for greater detail, shows that Min Aik Technology had debt of NT$664.8m at the end of September 2020, a reduction from NT$702.2m over a year. However, its balance sheet shows it holds NT$837.3m in cash, so it actually has NT$172.5m net cash.

A Look At Min Aik Technology's Liabilities

The latest balance sheet data shows that Min Aik Technology had liabilities of NT$1.46b due within a year, and liabilities of NT$329.3m falling due after that. On the other hand, it had cash of NT$837.3m and NT$798.9m worth of receivables due within a year. 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$1.94b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Min Aik Technology also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Min Aik Technology's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Min Aik Technology made a loss at the EBIT level, and saw its revenue drop to NT$4.3b, which is a fall of 24%. That makes us nervous, to say the least.

So How Risky Is Min Aik Technology?

While Min Aik Technology lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow 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. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. Like risks, for instance. Every company has them, and we've spotted 2 warning signs for Min Aik Technology (of which 1 is a bit unpleasant!) 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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