Elitegroup Computer SystemsLtd (TWSE:2331) Seems To Use Debt Quite Sensibly

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 note that Elitegroup Computer Systems Co.,Ltd. (TWSE:2331) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

See our latest analysis for Elitegroup Computer SystemsLtd

How Much Debt Does Elitegroup Computer SystemsLtd Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Elitegroup Computer SystemsLtd had debt of NT$663.1m, up from NT$431.0m in one year. However, it does have NT$7.50b in cash offsetting this, leading to net cash of NT$6.83b.

A Look At Elitegroup Computer SystemsLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Elitegroup Computer SystemsLtd had liabilities of NT$10.8b due within 12 months and liabilities of NT$1.09b due beyond that. On the other hand, it had cash of NT$7.50b and NT$2.63b worth of receivables due within a year. So its liabilities total NT$1.81b more than the combination of its cash and short-term receivables.

Of course, Elitegroup Computer SystemsLtd has a market capitalization of NT$13.2b, 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, Elitegroup Computer SystemsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Elitegroup Computer SystemsLtd's saving grace is its low debt levels, because its EBIT has tanked 95% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Elitegroup Computer SystemsLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Elitegroup Computer SystemsLtd 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. Happily for any shareholders, Elitegroup Computer SystemsLtd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Elitegroup Computer SystemsLtd does have more liabilities than liquid assets, it also has net cash of NT$6.83b. The cherry on top was that in converted 700% of that EBIT to free cash flow, bringing in -NT$560m. So we don't have any problem with Elitegroup Computer SystemsLtd's use of debt. 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. To that end, you should learn about the 2 warning signs we've spotted with Elitegroup Computer SystemsLtd (including 1 which makes us a bit uncomfortable) .

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.