Lite-On Technology (TWSE:2301) Has A Rock Solid Balance Sheet

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. As with many other companies Lite-On Technology Corporation (TWSE:2301) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Lite-On Technology

How Much Debt Does Lite-On Technology Carry?

The chart below, which you can click on for greater detail, shows that Lite-On Technology had NT$23.1b in debt in March 2024; about the same as the year before. However, its balance sheet shows it holds NT$84.8b in cash, so it actually has NT$61.7b net cash.

How Healthy Is Lite-On Technology's Balance Sheet?

We can see from the most recent balance sheet that Lite-On Technology had liabilities of NT$95.3b falling due within a year, and liabilities of NT$5.80b due beyond that. On the other hand, it had cash of NT$84.8b and NT$30.4b worth of receivables due within a year. So it actually has NT$14.1b more liquid assets than total liabilities.

This short term liquidity is a sign that Lite-On Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Lite-On Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Lite-On Technology has increased its EBIT by 2.4% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Lite-On 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Lite-On Technology 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. Happily for any shareholders, Lite-On Technology actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Lite-On Technology has NT$61.7b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$18b, being 112% of its EBIT. So is Lite-On Technology's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Lite-On Technology is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.