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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Gold Circuit Electronics Ltd. (TWSE:2368) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Gold Circuit Electronics

What Is Gold Circuit Electronics's Debt?

As you can see below, at the end of September 2024, Gold Circuit Electronics had NT$6.89b of debt, up from NT$5.18b a year ago. Click the image for more detail. But on the other hand it also has NT$8.24b in cash, leading to a NT$1.35b net cash position.

A Look At Gold Circuit Electronics' Liabilities

The latest balance sheet data shows that Gold Circuit Electronics had liabilities of NT$13.1b due within a year, and liabilities of NT$7.45b falling due after that. Offsetting these obligations, it had cash of NT$8.24b as well as receivables valued at NT$13.5b due within 12 months. So it actually has NT$1.25b 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$106.3b 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 64% 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 it is future earnings, more than anything, that will determine Gold Circuit Electronics's ability to maintain a healthy balance sheet going forward. 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. Gold Circuit Electronics 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. In the last three years, Gold Circuit Electronics's free cash flow amounted to 36% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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$1.35b, as well as more liquid assets than liabilities. And we liked the look of last year's 64% year-on-year EBIT growth. So we don't think Gold Circuit Electronics's use of debt is risky. 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 example, we've discovered 2 warning signs for Gold Circuit Electronics (1 shouldn't be ignored!) that you should be aware of before investing here.

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.