These 4 Measures Indicate That Delta Electronics (TWSE:2308) Is Using Debt Safely

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Delta Electronics, Inc. (TWSE:2308) makes use of debt. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Delta Electronics Carry?

The image below, which you can click on for greater detail, shows that at December 2024 Delta Electronics had debt of NT$64.4b, up from NT$57.3b in one year. But on the other hand it also has NT$121.5b in cash, leading to a NT$57.1b net cash position.

How Healthy Is Delta Electronics' Balance Sheet?

According to the last reported balance sheet, Delta Electronics had liabilities of NT$152.3b due within 12 months, and liabilities of NT$100.0b due beyond 12 months. On the other hand, it had cash of NT$121.5b and NT$100.0b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$30.8b.

Since publicly traded Delta Electronics shares are worth a very impressive total of NT$1.02t, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Delta Electronics boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Delta Electronics

And we also note warmly that Delta Electronics grew its EBIT by 17% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Delta Electronics can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Delta Electronics 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. Over the last three years, Delta Electronics recorded free cash flow worth a fulsome 80% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

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$57.1b. The cherry on top was that in converted 80% of that EBIT to free cash flow, bringing in NT$38b. So we don't think Delta Electronics'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. For example, we've discovered 1 warning sign for Delta Electronics that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.