Microtek International (TWSE:2305) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Microtek International, Inc. (TWSE:2305) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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 Microtek International

What Is Microtek International's Net Debt?

As you can see below, Microtek International had NT$51.0m of debt at March 2024, down from NT$106.0m a year prior. But it also has NT$1.10b in cash to offset that, meaning it has NT$1.05b net cash.

A Look At Microtek International's Liabilities

According to the last reported balance sheet, Microtek International had liabilities of NT$257.9m due within 12 months, and liabilities of NT$380.7m due beyond 12 months. Offsetting these obligations, it had cash of NT$1.10b as well as receivables valued at NT$101.9m due within 12 months. So it can boast NT$562.4m more liquid assets than total liabilities.

This surplus suggests that Microtek International has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Microtek International boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Microtek International will need earnings to service that debt. 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.

In the last year Microtek International wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to NT$639m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Microtek International?

While Microtek International lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of NT$44m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Microtek International has 1 warning sign we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com