Is Copartner Technology (TPE:3550) Using Too Much Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Copartner Technology Corporation (TPE:3550) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Copartner Technology

What Is Copartner Technology's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Copartner Technology had debt of NT$1.36b, up from NT$1.22b in one year. However, its balance sheet shows it holds NT$1.39b in cash, so it actually has NT$28.8m net cash.

A Look At Copartner Technology's Liabilities

The latest balance sheet data shows that Copartner Technology had liabilities of NT$1.51b due within a year, and liabilities of NT$555.9m falling due after that. Offsetting these obligations, it had cash of NT$1.39b as well as receivables valued at NT$1.41b due within 12 months. So it can boast NT$742.0m more liquid assets than total liabilities.

This surplus liquidity suggests that Copartner Technology's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Copartner Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Copartner Technology grew its EBIT by 37% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Copartner Technology'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Copartner Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Copartner Technology produced sturdy free cash flow equating to 66% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Copartner Technology has NT$28.8m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 37% over the last year. The bottom line is that Copartner Technology's use of debt is absolutely fine. 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. To that end, you should learn about the 4 warning signs we've spotted with Copartner Technology (including 2 which shouldn't be ignored) .

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. 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.
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