Would Prime Electronics & Satellitics (TPE:6152) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Prime Electronics & Satellitics Inc. (TPE:6152) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 Prime Electronics & Satellitics

What Is Prime Electronics & Satellitics's Debt?

As you can see below, Prime Electronics & Satellitics had NT$736.5m of debt at September 2020, down from NT$834.1m a year prior. On the flip side, it has NT$679.5m in cash leading to net debt of about NT$57.0m.

A Look At Prime Electronics & Satellitics's Liabilities

According to the last reported balance sheet, Prime Electronics & Satellitics had liabilities of NT$1.65b due within 12 months, and liabilities of NT$145.3m due beyond 12 months. Offsetting this, it had NT$679.5m in cash and NT$883.1m in receivables that were due within 12 months. So it has liabilities totalling NT$234.5m more than its cash and near-term receivables, combined.

Given Prime Electronics & Satellitics has a market capitalization of NT$2.28b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Prime Electronics & Satellitics'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, Prime Electronics & Satellitics made a loss at the EBIT level, and saw its revenue drop to NT$3.2b, which is a fall of 29%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Prime Electronics & Satellitics's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at NT$16m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Surprisingly, we note that it actually reported positive free cash flow of NT$47m and a profit of NT$33m. So one might argue that there's still a chance it can get things on the right track. 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. For example, we've discovered 3 warning signs for Prime Electronics & Satellitics (1 is concerning!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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