Here's Why Microelectronics Technology (TWSE:2314) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Microelectronics Technology Inc. (TWSE:2314) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Microelectronics Technology

How Much Debt Does Microelectronics Technology Carry?

The image below, which you can click on for greater detail, shows that Microelectronics Technology had debt of NT$1.97b at the end of June 2024, a reduction from NT$2.43b over a year. However, it does have NT$598.7m in cash offsetting this, leading to net debt of about NT$1.37b.

A Look At Microelectronics Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Microelectronics Technology had liabilities of NT$2.44b due within 12 months and liabilities of NT$617.4m due beyond that. On the other hand, it had cash of NT$598.7m and NT$611.0m worth of receivables due within a year. So it has liabilities totalling NT$1.84b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Microelectronics Technology has a market capitalization of NT$8.18b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Microelectronics Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Microelectronics Technology made a loss at the EBIT level, and saw its revenue drop to NT$2.0b, which is a fall of 57%. To be frank that doesn't bode well.

Caveat Emptor

While Microelectronics Technology's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost NT$736m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled NT$293m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Microelectronics Technology you should be aware of, and 2 of them are concerning.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.