Flexium Interconnect (TPE:6269) Seems To Use Debt Rather Sparingly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We can see that Flexium Interconnect, Inc. (TPE:6269) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Flexium Interconnect

What Is Flexium Interconnect's Debt?

You can click the graphic below for the historical numbers, but it shows that Flexium Interconnect had NT$3.06b of debt in September 2020, down from NT$3.54b, one year before. However, it does have NT$17.7b in cash offsetting this, leading to net cash of NT$14.6b.

How Healthy Is Flexium Interconnect's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Flexium Interconnect had liabilities of NT$10.8b due within 12 months and liabilities of NT$3.82b due beyond that. On the other hand, it had cash of NT$17.7b and NT$6.61b worth of receivables due within a year. So it can boast NT$9.67b more liquid assets than total liabilities.

This excess liquidity suggests that Flexium Interconnect is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Flexium Interconnect has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Flexium Interconnect 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 Flexium Interconnect'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Flexium Interconnect 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, Flexium Interconnect reported free cash flow worth 9.4% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Flexium Interconnect has net cash of NT$14.6b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 26% over the last year. So we don't think Flexium Interconnect's use of debt is risky. 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. Case in point: We've spotted 2 warning signs for Flexium Interconnect you should be aware of, and 1 of them makes us a bit uncomfortable.

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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