Lite-On Technology (TWSE:2301) Seems To Use Debt Quite Sensibly

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Lite-On Technology Corporation (TWSE:2301) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, 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$35.1b in debt in September 2024; about the same as the year before. However, its balance sheet shows it holds NT$99.0b in cash, so it actually has NT$63.9b net cash.

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

Zooming in on the latest balance sheet data, we can see that Lite-On Technology had liabilities of NT$104.8b due within 12 months and liabilities of NT$5.74b due beyond that. Offsetting these obligations, it had cash of NT$99.0b as well as receivables valued at NT$34.5b due within 12 months. So it actually has NT$22.9b 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.

On the other hand, Lite-On Technology's EBIT dived 11%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Lite-On 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. 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 generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Lite-On Technology has net cash of NT$63.9b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$12b, being 119% of its EBIT. So is Lite-On 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. For instance, we've identified 1 warning sign for Lite-On Technology that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.