Does G-TECH Optoelectronics (TWSE:3149) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, G-TECH Optoelectronics Corporation (TWSE:3149) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 G-TECH Optoelectronics

What Is G-TECH Optoelectronics's Debt?

You can click the graphic below for the historical numbers, but it shows that G-TECH Optoelectronics had NT$1.36b of debt in September 2024, down from NT$2.18b, one year before. On the flip side, it has NT$782.2m in cash leading to net debt of about NT$578.7m.

How Strong Is G-TECH Optoelectronics' Balance Sheet?

We can see from the most recent balance sheet that G-TECH Optoelectronics had liabilities of NT$647.9m falling due within a year, and liabilities of NT$1.28b due beyond that. Offsetting these obligations, it had cash of NT$782.2m as well as receivables valued at NT$534.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$615.1m.

Of course, G-TECH Optoelectronics has a market capitalization of NT$6.61b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if G-TECH Optoelectronics 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.

In the last year G-TECH Optoelectronics wasn't profitable at an EBIT level, but managed to grow its revenue by 6.9%, to NT$2.1b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, G-TECH Optoelectronics had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at NT$202m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through NT$128m of cash over the last year. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with G-TECH Optoelectronics (at least 1 which is concerning) , and understanding them should be part of your investment process.

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.