These 4 Measures Indicate That Arcadyan Technology (TWSE:3596) Is Using Debt Safely

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Arcadyan Technology Corporation (TWSE:3596) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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.

Check out our latest analysis for Arcadyan Technology

What Is Arcadyan Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Arcadyan Technology had NT$1.42b of debt, an increase on NT$1.02b, over one year. However, its balance sheet shows it holds NT$10.6b in cash, so it actually has NT$9.20b net cash.

A Look At Arcadyan Technology's Liabilities

We can see from the most recent balance sheet that Arcadyan Technology had liabilities of NT$24.3b falling due within a year, and liabilities of NT$130.5m due beyond that. Offsetting this, it had NT$10.6b in cash and NT$8.94b in receivables that were due within 12 months. So it has liabilities totalling NT$4.91b more than its cash and near-term receivables, combined.

Of course, Arcadyan Technology has a market capitalization of NT$41.9b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Arcadyan Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Arcadyan Technology grew its EBIT at 14% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Arcadyan Technology's ability to maintain a healthy balance sheet going forward. 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 actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

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$9.20b. The cherry on top was that in converted 144% of that EBIT to free cash flow, bringing in NT$5.6b. 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. However, not all investment risk resides within the balance sheet - far from it. For example - Arcadyan Technology has 1 warning sign we think you should be aware of.

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.