Is MiTAC Holdings (TWSE:3706) A Risky Investment?

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.' 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. Importantly, MiTAC Holdings Corporation (TWSE:3706) does carry debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for MiTAC Holdings

What Is MiTAC Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that MiTAC Holdings had NT$2.09b of debt in March 2024, down from NT$4.25b, one year before. But on the other hand it also has NT$11.6b in cash, leading to a NT$9.50b net cash position.

How Healthy Is MiTAC Holdings' Balance Sheet?

We can see from the most recent balance sheet that MiTAC Holdings had liabilities of NT$18.8b falling due within a year, and liabilities of NT$9.26b due beyond that. Offsetting these obligations, it had cash of NT$11.6b as well as receivables valued at NT$11.2b due within 12 months. So its liabilities total NT$5.27b more than the combination of its cash and short-term receivables.

Given MiTAC Holdings has a market capitalization of NT$58.2b, 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$249m. 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 MiTAC Holdings 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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

We could understand if investors are concerned about MiTAC Holdings's liabilities, but we can be reassured by the fact it has has net cash of NT$9.50b. And it impressed us with free cash flow of NT$3.1b, being 1,232% 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. We've identified 2 warning signs with MiTAC Holdings , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com