Solomon Technology (TWSE:2359) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Solomon Technology Corporation (TWSE:2359) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Solomon Technology

What Is Solomon Technology's Net Debt?

As you can see below, at the end of September 2024, Solomon Technology had NT$839.3m of debt, up from NT$748.0m a year ago. Click the image for more detail. However, it does have NT$4.30b in cash offsetting this, leading to net cash of NT$3.46b.

How Strong Is Solomon Technology's Balance Sheet?

We can see from the most recent balance sheet that Solomon Technology had liabilities of NT$3.63b falling due within a year, and liabilities of NT$293.2m due beyond that. Offsetting this, it had NT$4.30b in cash and NT$1.01b in receivables that were due within 12 months. So it actually has NT$1.39b more liquid assets than total liabilities.

This short term liquidity is a sign that Solomon Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Solomon Technology has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Solomon 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, Solomon Technology made a loss at the EBIT level, and saw its revenue drop to NT$3.6b, which is a fall of 18%. We would much prefer see growth.

So How Risky Is Solomon Technology?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Solomon Technology lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through NT$63m of cash and made a loss of NT$7.5m. With only NT$3.46b on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 instance, we've identified 1 warning sign for Solomon Technology that you should be aware of.

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.