Wiwynn (TWSE:6669) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Wiwynn Corporation (TWSE:6669) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Wiwynn

What Is Wiwynn's Net Debt?

As you can see below, at the end of September 2024, Wiwynn had NT$31.1b of debt, up from NT$13.5b a year ago. Click the image for more detail. However, its balance sheet shows it holds NT$47.4b in cash, so it actually has NT$16.3b net cash.

How Strong Is Wiwynn's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Wiwynn had liabilities of NT$69.1b due within 12 months and liabilities of NT$28.1b due beyond that. On the other hand, it had cash of NT$47.4b and NT$43.0b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$6.72b.

This state of affairs indicates that Wiwynn's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the NT$394.0b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Wiwynn also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Wiwynn has boosted its EBIT by 47%, thus reducing the spectre of future debt repayments. 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 Wiwynn 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 Wiwynn 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. In the last three years, Wiwynn's free cash flow amounted to 40% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Wiwynn has NT$16.3b in net cash. And we liked the look of last year's 47% year-on-year EBIT growth. So is Wiwynn'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. Case in point: We've spotted 3 warning signs for Wiwynn you should be aware of, and 2 of them are concerning.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.