Micro-Star International (TWSE:2377) Has A Rock Solid Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Micro-Star International Co., Ltd. (TWSE:2377) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Micro-Star International

How Much Debt Does Micro-Star International Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Micro-Star International had debt of NT$3.60b, up from NT$3.00b in one year. But it also has NT$22.5b in cash to offset that, meaning it has NT$18.9b net cash.

A Look At Micro-Star International's Liabilities

Zooming in on the latest balance sheet data, we can see that Micro-Star International had liabilities of NT$51.5b due within 12 months and liabilities of NT$849.3m due beyond that. On the other hand, it had cash of NT$22.5b and NT$27.7b worth of receivables due within a year. So it has liabilities totalling NT$2.19b more than its cash and near-term receivables, combined.

This state of affairs indicates that Micro-Star International's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the NT$152.9b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Micro-Star International also has more cash than debt, so we're pretty confident it can manage its debt safely.

While Micro-Star International doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Micro-Star International 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 Micro-Star International 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 most recent three years, Micro-Star International recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Micro-Star International's liabilities, but we can be reassured by the fact it has has net cash of NT$18.9b. And it impressed us with free cash flow of NT$917m, being 76% of its EBIT. So we don't think Micro-Star International's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Micro-Star International (including 1 which shouldn't be ignored) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.