Health Check: How Prudently Does Innolux (TWSE:3481) Use Debt?

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.' 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. We note that Innolux Corporation (TWSE:3481) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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.

View our latest analysis for Innolux

How Much Debt Does Innolux Carry?

As you can see below, at the end of December 2023, Innolux had NT$39.7b of debt, up from NT$36.0b a year ago. Click the image for more detail. But on the other hand it also has NT$62.6b in cash, leading to a NT$22.9b net cash position.

How Strong Is Innolux's Balance Sheet?

According to the last reported balance sheet, Innolux had liabilities of NT$87.6b due within 12 months, and liabilities of NT$41.1b due beyond 12 months. Offsetting this, it had NT$62.6b in cash and NT$32.0b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$34.0b.

While this might seem like a lot, it is not so bad since Innolux has a market capitalization of NT$133.3b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Innolux also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Innolux 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.

Over 12 months, Innolux made a loss at the EBIT level, and saw its revenue drop to NT$212b, which is a fall of 5.4%. That's not what we would hope to see.

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$12b of cash and made a loss of NT$19b. But the saving grace is the NT$22.9b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Innolux that you should be aware of.

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.