Does Vactronics technologies (TWSE:6742) 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 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. As with many other companies Vactronics technologies inc. (TWSE:6742) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Vactronics technologies

What Is Vactronics technologies's Net Debt?

The image below, which you can click on for greater detail, shows that Vactronics technologies had debt of NT$294.3m at the end of September 2024, a reduction from NT$337.1m over a year. But it also has NT$856.6m in cash to offset that, meaning it has NT$562.2m net cash.

How Strong Is Vactronics technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Vactronics technologies had liabilities of NT$351.3m due within 12 months and liabilities of NT$99.2m due beyond that. On the other hand, it had cash of NT$856.6m and NT$210.7m worth of receivables due within a year. So it actually has NT$616.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Vactronics technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Vactronics technologies has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Vactronics technologies's saving grace is its low debt levels, because its EBIT has tanked 100% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Vactronics technologies'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Vactronics technologies 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, Vactronics technologies barely recorded positive free cash flow, in total. Some might say that's a concern, when it comes considering how easily it would be for it to down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Vactronics technologies has net cash of NT$562.2m, as well as more liquid assets than liabilities. So we don't have any problem with Vactronics technologies's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Vactronics technologies , and understanding them should be part of your investment process.

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.