Is Polytronics Technology (TPE:6224) Using Too Much Debt?

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. As with many other companies Polytronics Technology Corporation (TPE:6224) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Polytronics Technology

How Much Debt Does Polytronics Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Polytronics Technology had NT$330.9m of debt, an increase on NT$77.1m, over one year. However, its balance sheet shows it holds NT$1.13b in cash, so it actually has NT$800.4m net cash.

A Look At Polytronics Technology's Liabilities

The latest balance sheet data shows that Polytronics Technology had liabilities of NT$737.6m due within a year, and liabilities of NT$236.6m falling due after that. Offsetting this, it had NT$1.13b in cash and NT$500.4m in receivables that were due within 12 months. So it actually has NT$657.6m more liquid assets than total liabilities.

This surplus suggests that Polytronics Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Polytronics Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Polytronics Technology grew its EBIT by 26% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Polytronics Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Polytronics Technology 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. During the last three years, Polytronics Technology generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Polytronics Technology has net cash of NT$800.4m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$377m, being 84% of its EBIT. So is Polytronics Technology's debt a risk? It doesn't seem so to us. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Polytronics Technology , 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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