TOPBI International Holdings (TPE:2929) Has Debt But No Earnings; Should You Worry?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, TOPBI International Holdings Limited (TPE:2929) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for TOPBI International Holdings

How Much Debt Does TOPBI International Holdings Carry?

The image below, which you can click on for greater detail, shows that TOPBI International Holdings had debt of NT$381.7m at the end of September 2020, a reduction from NT$709.2m over a year. However, its balance sheet shows it holds NT$4.51b in cash, so it actually has NT$4.12b net cash.

How Healthy Is TOPBI International Holdings's Balance Sheet?

The latest balance sheet data shows that TOPBI International Holdings had liabilities of NT$1.48b due within a year, and liabilities of NT$288.6m falling due after that. On the other hand, it had cash of NT$4.51b and NT$675.8m worth of receivables due within a year. So it can boast NT$3.42b more liquid assets than total liabilities.

This surplus strongly suggests that TOPBI International Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Simply put, the fact that TOPBI International Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is TOPBI International Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year TOPBI International Holdings had a loss before interest and tax, and actually shrunk its revenue by 41%, to NT$4.1b. That makes us nervous, to say the least.

So How Risky Is TOPBI International Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that TOPBI International Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through NT$366m of cash and made a loss of NT$972m. With only NT$4.12b on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with TOPBI International Holdings (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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. 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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