Does Innolux (TWSE:3481) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Innolux Corporation (TWSE:3481) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. 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 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 Innolux

What Is Innolux's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Innolux had NT$41.3b of debt in June 2024, down from NT$70.1b, one year before. However, its balance sheet shows it holds NT$58.7b in cash, so it actually has NT$17.3b net cash.

How Healthy Is Innolux's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Innolux had liabilities of NT$89.0b due within 12 months and liabilities of NT$36.8b due beyond that. Offsetting this, it had NT$58.7b in cash and NT$36.8b in receivables that were due within 12 months. So its liabilities total NT$30.3b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Innolux has a market capitalization of NT$121.8b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Innolux boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Innolux'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.

Over 12 months, Innolux reported revenue of NT$216b, which is a gain of 4.8%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Innolux?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Innolux lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through NT$6.5b of cash and made a loss of NT$5.8b. But the saving grace is the NT$17.3b on the balance sheet. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Innolux you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.