Delta Electronics (TWSE:2308) Seems To Use Debt Rather Sparingly

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 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 note that Delta Electronics, Inc. (TWSE:2308) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Delta Electronics

What Is Delta Electronics's Debt?

As you can see below, at the end of September 2024, Delta Electronics had NT$79.2b of debt, up from NT$59.9b a year ago. Click the image for more detail. However, its balance sheet shows it holds NT$124.4b in cash, so it actually has NT$45.2b net cash.

How Strong Is Delta Electronics' Balance Sheet?

The latest balance sheet data shows that Delta Electronics had liabilities of NT$136.0b due within a year, and liabilities of NT$118.9b falling due after that. Offsetting this, it had NT$124.4b in cash and NT$97.7b in receivables that were due within 12 months. So it has liabilities totalling NT$32.7b more than its cash and near-term receivables, combined.

Of course, Delta Electronics has a titanic market capitalization of NT$1.04t, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Delta Electronics boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Delta Electronics grew its EBIT by 14% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Delta Electronics can strengthen its balance sheet over time. 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 Delta Electronics 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, Delta Electronics produced sturdy free cash flow equating to 75% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Delta Electronics's liabilities, but we can be reassured by the fact it has has net cash of NT$45.2b. And it impressed us with free cash flow of NT$47b, being 75% of its EBIT. So is Delta Electronics's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Delta Electronics, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.