Does Polytronics Technology (TWSE:6224) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Polytronics Technology Corp. (TWSE:6224) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Polytronics Technology

How Much Debt Does Polytronics Technology Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Polytronics Technology had debt of NT$900.1m, up from NT$783.2m in one year. But on the other hand it also has NT$1.23b in cash, leading to a NT$334.1m net cash position.

How Strong Is Polytronics Technology's Balance Sheet?

We can see from the most recent balance sheet that Polytronics Technology had liabilities of NT$1.28b falling due within a year, and liabilities of NT$328.0m due beyond that. Offsetting these obligations, it had cash of NT$1.23b as well as receivables valued at NT$684.3m due within 12 months. So it actually has NT$306.1m more liquid assets than total liabilities.

This surplus suggests that Polytronics Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Polytronics Technology boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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$2.7b, which is a fall of 3.1%. We would much prefer see growth.

So How Risky Is Polytronics Technology?

While Polytronics Technology lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Polytronics Technology you should know about.

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.