Is Gold Circuit Electronics (TWSE:2368) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Gold Circuit Electronics Ltd. (TWSE:2368) does carry debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Gold Circuit Electronics

What Is Gold Circuit Electronics's Net Debt?

As you can see below, Gold Circuit Electronics had NT$5.18b of debt at September 2023, down from NT$5.83b a year prior. However, its balance sheet shows it holds NT$6.11b in cash, so it actually has NT$925.7m net cash.

A Look At Gold Circuit Electronics' Liabilities

According to the last reported balance sheet, Gold Circuit Electronics had liabilities of NT$12.3b due within 12 months, and liabilities of NT$3.07b due beyond 12 months. Offsetting these obligations, it had cash of NT$6.11b as well as receivables valued at NT$10.8b due within 12 months. So it actually has NT$1.50b 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$122.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Gold Circuit Electronics boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Gold Circuit Electronics has seen its EBIT plunge 13% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. During the last three years, Gold Circuit Electronics produced sturdy free cash flow equating to 53% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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$925.7m, as well as more liquid assets than liabilities. So we are not troubled with Gold Circuit Electronics's debt use. 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. For example - Gold Circuit Electronics has 2 warning signs we think you should be aware of.

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.