Is Arcadyan Technology (TWSE:3596) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Arcadyan Technology Corporation (TWSE:3596) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Arcadyan Technology

How Much Debt Does Arcadyan Technology Carry?

The image below, which you can click on for greater detail, shows that Arcadyan Technology had debt of NT$1.21b at the end of March 2024, a reduction from NT$3.88b over a year. However, its balance sheet shows it holds NT$10.6b in cash, so it actually has NT$9.37b net cash.

How Strong Is Arcadyan Technology's Balance Sheet?

We can see from the most recent balance sheet that Arcadyan Technology had liabilities of NT$28.5b falling due within a year, and liabilities of NT$150.0m due beyond that. Offsetting these obligations, it had cash of NT$10.6b as well as receivables valued at NT$8.70b due within 12 months. So it has liabilities totalling NT$9.35b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Arcadyan Technology is worth NT$36.4b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Arcadyan Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Arcadyan Technology grew its EBIT by 34% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Arcadyan Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Arcadyan Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Arcadyan Technology recorded free cash flow worth a fulsome 98% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

Although Arcadyan Technology's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of NT$9.37b. The cherry on top was that in converted 98% of that EBIT to free cash flow, bringing in NT$8.8b. So is Arcadyan Technology's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Arcadyan Technology you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.