Does Prime Electronics & Satellitics (TPE:6152) Have A 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Prime Electronics & Satellitics Inc. (TPE:6152) does carry debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Prime Electronics & Satellitics

What Is Prime Electronics & Satellitics's Debt?

As you can see below, Prime Electronics & Satellitics had NT$685.4m of debt at December 2020, down from NT$785.6m a year prior. However, it does have NT$766.8m in cash offsetting this, leading to net cash of NT$81.4m.

How Healthy Is Prime Electronics & Satellitics' Balance Sheet?

According to the last reported balance sheet, Prime Electronics & Satellitics had liabilities of NT$1.92b due within 12 months, and liabilities of NT$134.9m due beyond 12 months. Offsetting these obligations, it had cash of NT$766.8m as well as receivables valued at NT$1.17b due within 12 months. So its liabilities total NT$120.3m more than the combination of its cash and short-term receivables.

Given Prime Electronics & Satellitics has a market capitalization of NT$1.90b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Prime Electronics & Satellitics 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 you can't view debt in total isolation; since Prime Electronics & Satellitics 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.

Over 12 months, Prime Electronics & Satellitics made a loss at the EBIT level, and saw its revenue drop to NT$3.1b, which is a fall of 33%. To be frank that doesn't bode well.

So How Risky Is Prime Electronics & Satellitics?

Although Prime Electronics & Satellitics had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of NT$22m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. We've identified 4 warning signs with Prime Electronics & Satellitics (at least 2 which don't sit too well with us) , and understanding them should be part of your investment process.

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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