Microelectronics Technology (TWSE:2314) Is Carrying A Fair Bit Of Debt

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 Microelectronics Technology Inc. (TWSE:2314) makes use of debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Microelectronics Technology

What Is Microelectronics Technology's Net Debt?

As you can see below, Microelectronics Technology had NT$2.27b of debt at December 2023, down from NT$2.43b a year prior. However, because it has a cash reserve of NT$1.02b, its net debt is less, at about NT$1.24b.

How Strong Is Microelectronics Technology's Balance Sheet?

We can see from the most recent balance sheet that Microelectronics Technology had liabilities of NT$2.81b falling due within a year, and liabilities of NT$786.7m due beyond that. Offsetting this, it had NT$1.02b in cash and NT$688.2m in receivables that were due within 12 months. So its liabilities total NT$1.88b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Microelectronics Technology is worth NT$8.49b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Microelectronics Technology's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Microelectronics Technology made a loss at the EBIT level, and saw its revenue drop to NT$3.4b, which is a fall of 25%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Microelectronics Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at NT$527m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through NT$290m of cash over the last year. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Microelectronics Technology (of which 1 doesn't sit too well with us!) you should know about.

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.