Is Min Aik Technology (TWSE:3060) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Min Aik Technology Co., Ltd. (TWSE:3060) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Min Aik Technology

What Is Min Aik Technology's Debt?

The image below, which you can click on for greater detail, shows that Min Aik Technology had debt of NT$572.1m at the end of March 2024, a reduction from NT$645.8m over a year. However, it does have NT$634.5m in cash offsetting this, leading to net cash of NT$62.5m.

A Look At Min Aik Technology's Liabilities

The latest balance sheet data shows that Min Aik Technology had liabilities of NT$1.29b due within a year, and liabilities of NT$429.0m falling due after that. Offsetting these obligations, it had cash of NT$634.5m as well as receivables valued at NT$862.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$226.1m.

Since publicly traded Min Aik Technology shares are worth a total of NT$4.64b, 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. While it does have liabilities worth noting, Min Aik Technology also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Min Aik Technology's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Min Aik Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 3.9%, to NT$2.9b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Min Aik Technology?

Although Min Aik Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of NT$350m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Min Aik Technology that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com