Pegatron (TWSE:4938) Has A Pretty Healthy Balance Sheet

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.' 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. Importantly, Pegatron Corporation (TWSE:4938) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Pegatron

How Much Debt Does Pegatron Carry?

You can click the graphic below for the historical numbers, but it shows that Pegatron had NT$96.1b of debt in December 2023, down from NT$131.5b, one year before. However, it does have NT$115.5b in cash offsetting this, leading to net cash of NT$19.4b.

A Look At Pegatron's Liabilities

We can see from the most recent balance sheet that Pegatron had liabilities of NT$282.3b falling due within a year, and liabilities of NT$53.2b due beyond that. Offsetting these obligations, it had cash of NT$115.5b as well as receivables valued at NT$155.3b due within 12 months. So it has liabilities totalling NT$64.6b more than its cash and near-term receivables, combined.

Pegatron has a market capitalization of NT$251.8b, so it could very likely raise cash to ameliorate 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. While it does have liabilities worth noting, Pegatron also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Pegatron's saving grace is its low debt levels, because its EBIT has tanked 41% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Pegatron'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, a company can only pay off debt with cold hard cash, not accounting profits. While Pegatron 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, Pegatron actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although Pegatron'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$19.4b. The cherry on top was that in converted 161% of that EBIT to free cash flow, bringing in NT$66b. So we don't have any problem with Pegatron's use of debt. 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, we've discovered 1 warning sign for Pegatron that you should be aware of before investing here.

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.