Is Chroma ATE (TWSE:2360) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Chroma ATE Inc. (TWSE:2360) does carry debt. But is this debt a concern to shareholders?

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

How Much Debt Does Chroma ATE Carry?

As you can see below, Chroma ATE had NT$3.13b of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have NT$4.79b in cash offsetting this, leading to net cash of NT$1.67b.

How Healthy Is Chroma ATE's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Chroma ATE had liabilities of NT$8.42b due within 12 months and liabilities of NT$2.55b due beyond that. Offsetting these obligations, it had cash of NT$4.79b as well as receivables valued at NT$5.89b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$282.2m.

This state of affairs indicates that Chroma ATE's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the NT$107.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Chroma ATE boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Chroma ATE saw its EBIT drop by 7.3% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Chroma ATE can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Chroma ATE 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. During the last three years, Chroma ATE produced sturdy free cash flow equating to 61% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Chroma ATE has NT$1.67b in net cash. So we don't have any problem with Chroma ATE'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. For instance, we've identified 1 warning sign for Chroma ATE that you should be aware of.

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.