Does Pegatron (TPE:4938) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Pegatron Corporation (TPE:4938) does have debt on its balance sheet. 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. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Pegatron

What Is Pegatron's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Pegatron had debt of NT$158.7b, up from NT$122.6b in one year. But on the other hand it also has NT$183.7b in cash, leading to a NT$24.9b net cash position.

A Look At Pegatron's Liabilities

Zooming in on the latest balance sheet data, we can see that Pegatron had liabilities of NT$407.5b due within 12 months and liabilities of NT$36.1b due beyond that. Offsetting this, it had NT$183.7b in cash and NT$203.0b in receivables that were due within 12 months. So it has liabilities totalling NT$57.0b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Pegatron has a market capitalization of NT$196.8b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Pegatron also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Pegatron grew its EBIT by 39% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Pegatron can strengthen its balance sheet over time. 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 company can only pay off debt with cold hard cash, not accounting profits. Pegatron 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. During the last three years, Pegatron burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

Although Pegatron's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of NT$24.9b. And it impressed us with its EBIT growth of 39% over the last year. So we don't have any problem with Pegatron's use of debt. 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. We've identified 4 warning signs with Pegatron (at least 2 which are concerning) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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