We Think First Copper Technology (TPE:2009) Has A Fair Chunk Of Debt

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 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. Importantly, First Copper Technology Co., Ltd. (TPE:2009) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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.

Check out our latest analysis for First Copper Technology

What Is First Copper Technology's Net Debt?

As you can see below, First Copper Technology had NT$927.8m of debt at September 2020, down from NT$987.9m a year prior. On the flip side, it has NT$264.9m in cash leading to net debt of about NT$662.9m.

How Strong Is First Copper Technology's Balance Sheet?

According to the last reported balance sheet, First Copper Technology had liabilities of NT$1.08b due within 12 months, and liabilities of NT$269.7m due beyond 12 months. Offsetting these obligations, it had cash of NT$264.9m as well as receivables valued at NT$172.1m due within 12 months. So its liabilities total NT$912.4m more than the combination of its cash and short-term receivables.

Since publicly traded First Copper Technology shares are worth a total of NT$9.37b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since First Copper Technology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year First Copper Technology had a loss before interest and tax, and actually shrunk its revenue by 14%, to NT$2.3b. That's not what we would hope to see.

Caveat Emptor

Not only did First Copper Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost NT$132m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of NT$17m and the profit of NT$9.9m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for First Copper Technology 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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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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