We Think Hiwin Mikrosystem (TWSE:4576) Has A Fair Chunk Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that Hiwin Mikrosystem Corporation (TWSE:4576) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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, 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Hiwin Mikrosystem

How Much Debt Does Hiwin Mikrosystem Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Hiwin Mikrosystem had NT$1.11b of debt, an increase on NT$824.3m, over one year. On the flip side, it has NT$553.9m in cash leading to net debt of about NT$551.9m.

How Healthy Is Hiwin Mikrosystem's Balance Sheet?

According to the last reported balance sheet, Hiwin Mikrosystem had liabilities of NT$1.19b due within 12 months, and liabilities of NT$902.4m due beyond 12 months. On the other hand, it had cash of NT$553.9m and NT$376.1m worth of receivables due within a year. So its liabilities total NT$1.16b more than the combination of its cash and short-term receivables.

Since publicly traded Hiwin Mikrosystem shares are worth a total of NT$8.37b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hiwin Mikrosystem'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.

Over 12 months, Hiwin Mikrosystem made a loss at the EBIT level, and saw its revenue drop to NT$2.1b, which is a fall of 29%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Hiwin Mikrosystem's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at NT$34m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled NT$225m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. For riskier companies like Hiwin Mikrosystem I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.

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

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.