Silicon Optronics (TWSE:3530) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Silicon Optronics, Inc. (TWSE:3530) makes use of debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

Check out our latest analysis for Silicon Optronics

What Is Silicon Optronics's Debt?

The image below, which you can click on for greater detail, shows that Silicon Optronics had debt of NT$250.0m at the end of September 2024, a reduction from NT$500.0m over a year. However, it does have NT$992.4m in cash offsetting this, leading to net cash of NT$742.4m.

A Look At Silicon Optronics' Liabilities

The latest balance sheet data shows that Silicon Optronics had liabilities of NT$579.3m due within a year, and liabilities of NT$7.19m falling due after that. Offsetting these obligations, it had cash of NT$992.4m as well as receivables valued at NT$217.1m due within 12 months. So it actually has NT$623.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Silicon Optronics could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Silicon Optronics has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Silicon Optronics's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Silicon Optronics wasn't profitable at an EBIT level, but managed to grow its revenue by 8.2%, to NT$1.8b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Silicon Optronics?

While Silicon Optronics lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow NT$307m. 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. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. For example, we've discovered 1 warning sign for Silicon Optronics that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.