These 4 Measures Indicate That Bizlink Holding (TPE:3665) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We can see that Bizlink Holding Inc. (TPE:3665) does use debt in its business. But should shareholders be worried about its use of debt?

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 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Bizlink Holding

What Is Bizlink Holding's Net Debt?

The chart below, which you can click on for greater detail, shows that Bizlink Holding had NT$3.34b in debt in September 2020; about the same as the year before. But on the other hand it also has NT$4.25b in cash, leading to a NT$909.7m net cash position.

How Strong Is Bizlink Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bizlink Holding had liabilities of NT$4.70b due within 12 months and liabilities of NT$3.80b due beyond that. On the other hand, it had cash of NT$4.25b and NT$5.28b worth of receivables due within a year. So it can boast NT$1.02b more liquid assets than total liabilities.

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

And we also note warmly that Bizlink Holding grew its EBIT by 11% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Bizlink Holding's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Bizlink Holding 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. In the last three years, Bizlink Holding's free cash flow amounted to 37% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Bizlink Holding has net cash of NT$909.7m, as well as more liquid assets than liabilities. And it also grew its EBIT by 11% over the last year. So we are not troubled with Bizlink Holding's debt use. 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. Case in point: We've spotted 1 warning sign for Bizlink Holding you should be aware of.

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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