These 4 Measures Indicate That Giga-Byte Technology (TWSE:2376) Is Using Debt Reasonably Well

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 can see that Giga-Byte Technology Co., Ltd. (TWSE:2376) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Giga-Byte Technology

How Much Debt Does Giga-Byte Technology Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Giga-Byte Technology had debt of NT$30.4b, up from NT$8.87b in one year. But on the other hand it also has NT$34.1b in cash, leading to a NT$3.74b net cash position.

A Look At Giga-Byte Technology's Liabilities

We can see from the most recent balance sheet that Giga-Byte Technology had liabilities of NT$60.8b falling due within a year, and liabilities of NT$19.1b due beyond that. On the other hand, it had cash of NT$34.1b and NT$34.3b worth of receivables due within a year. So it has liabilities totalling NT$11.4b more than its cash and near-term receivables, combined.

Since publicly traded Giga-Byte Technology shares are worth a total of NT$174.8b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Giga-Byte Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Giga-Byte Technology grew its EBIT by 187% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Giga-Byte Technology 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 Giga-Byte Technology 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. Over the last three years, Giga-Byte Technology recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

We could understand if investors are concerned about Giga-Byte Technology's liabilities, but we can be reassured by the fact it has has net cash of NT$3.74b. And it impressed us with its EBIT growth of 187% over the last year. So we don't have any problem with Giga-Byte Technology's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Giga-Byte Technology (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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.