Does MiTAC Holdings (TWSE:3706) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that MiTAC Holdings Corporation (TWSE:3706) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for MiTAC Holdings

What Is MiTAC Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that MiTAC Holdings had NT$1.09b of debt in September 2024, down from NT$1.78b, one year before. But on the other hand it also has NT$10.8b in cash, leading to a NT$9.67b net cash position.

How Healthy Is MiTAC Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that MiTAC Holdings had liabilities of NT$23.5b due within 12 months and liabilities of NT$9.17b due beyond that. Offsetting this, it had NT$10.8b in cash and NT$16.6b in receivables that were due within 12 months. So it has liabilities totalling NT$5.41b more than its cash and near-term receivables, combined.

Given MiTAC Holdings has a market capitalization of NT$81.0b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, MiTAC Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, MiTAC Holdings turned things around in the last 12 months, delivering and EBIT of NT$1.2b. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since MiTAC Holdings will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While MiTAC Holdings 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 year, MiTAC Holdings actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that MiTAC Holdings has NT$9.67b in net cash. And it impressed us with free cash flow of NT$2.5b, being 219% of its EBIT. So is MiTAC Holdings's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example MiTAC Holdings has 2 warning signs (and 1 which is concerning) we think 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.