Gold Circuit Electronics (TWSE:2368) Seems To Use Debt Rather Sparingly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Gold Circuit Electronics Ltd. (TWSE:2368) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Gold Circuit Electronics

How Much Debt Does Gold Circuit Electronics Carry?

As you can see below, at the end of June 2024, Gold Circuit Electronics had NT$5.77b of debt, up from NT$5.24b a year ago. Click the image for more detail. However, its balance sheet shows it holds NT$8.80b in cash, so it actually has NT$3.03b net cash.

How Healthy Is Gold Circuit Electronics' Balance Sheet?

According to the last reported balance sheet, Gold Circuit Electronics had liabilities of NT$13.7b due within 12 months, and liabilities of NT$6.22b due beyond 12 months. Offsetting this, it had NT$8.80b in cash and NT$12.8b in receivables that were due within 12 months. So it actually has NT$1.71b more liquid assets than total liabilities.

Having regard to Gold Circuit Electronics' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the NT$91.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Gold Circuit Electronics has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Gold Circuit Electronics grew its EBIT by 47% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Gold Circuit Electronics can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Gold Circuit Electronics 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. In the last three years, Gold Circuit Electronics's free cash flow amounted to 43% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Gold Circuit Electronics has net cash of NT$3.03b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 47% over the last year. So is Gold Circuit Electronics's debt a risk? It doesn't seem so to us. 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. Be aware that Gold Circuit Electronics is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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.