Does Polytronics Technology (TWSE:6224) Have A 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.' 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. We can see that Polytronics Technology Corp. (TWSE:6224) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Polytronics Technology

What Is Polytronics Technology's Debt?

The chart below, which you can click on for greater detail, shows that Polytronics Technology had NT$804.9m in debt in March 2024; about the same as the year before. However, its balance sheet shows it holds NT$1.26b in cash, so it actually has NT$451.1m net cash.

A Look At Polytronics Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Polytronics Technology had liabilities of NT$1.44b due within 12 months and liabilities of NT$230.7m due beyond that. On the other hand, it had cash of NT$1.26b and NT$668.4m worth of receivables due within a year. So it actually has NT$252.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Polytronics Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Polytronics Technology boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Polytronics Technology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Polytronics Technology made a loss at the EBIT level, and saw its revenue drop to NT$2.8b, which is a fall of 2.2%. We would much prefer see growth.

So How Risky Is Polytronics Technology?

Although Polytronics Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of NT$127m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Polytronics Technology (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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