MiTAC Holdings (TPE:3706) Has A Pretty Healthy Balance Sheet

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.' 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, MiTAC Holdings Corporation (TPE:3706) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for MiTAC Holdings

What Is MiTAC Holdings's Net Debt?

As you can see below, at the end of September 2020, MiTAC Holdings had NT$3.92b of debt, up from NT$1.93b a year ago. Click the image for more detail. However, its balance sheet shows it holds NT$5.53b in cash, so it actually has NT$1.61b net cash.

How Healthy Is MiTAC Holdings' Balance Sheet?

The latest balance sheet data shows that MiTAC Holdings had liabilities of NT$12.6b due within a year, and liabilities of NT$1.80b falling due after that. On the other hand, it had cash of NT$5.53b and NT$6.64b worth of receivables due within a year. So its liabilities total NT$2.20b more than the combination of its cash and short-term receivables.

Since publicly traded MiTAC Holdings shares are worth a total of NT$35.3b, it seems unlikely that this level of liabilities would be a major 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, MiTAC Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that MiTAC Holdings has boosted its EBIT by 41%, thus reducing the spectre of future debt repayments. 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 MiTAC Holdings'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 MiTAC Holdings 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, MiTAC Holdings saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

We could understand if investors are concerned about MiTAC Holdings's liabilities, but we can be reassured by the fact it has has net cash of NT$1.61b. And it impressed us with its EBIT growth of 41% over the last year. So we don't have any problem with MiTAC Holdings's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for MiTAC Holdings that you should be aware of.

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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