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

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 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, First Copper Technology Co., Ltd. (TPE:2009) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. 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 First Copper Technology

What Is First Copper Technology's Net Debt?

The image below, which you can click on for greater detail, shows that First Copper Technology had debt of NT$1.04b at the end of December 2020, a reduction from NT$1.19b over a year. However, it also had NT$298.1m in cash, and so its net debt is NT$740.3m.

A Look At First Copper Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that First Copper Technology had liabilities of NT$1.22b due within 12 months and liabilities of NT$265.9m due beyond that. Offsetting these obligations, it had cash of NT$298.1m as well as receivables valued at NT$209.2m due within 12 months. So its liabilities total NT$982.3m more than the combination of its cash and short-term receivables.

Since publicly traded First Copper Technology shares are worth a total of NT$11.3b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since First Copper Technology will need earnings to service that debt. 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 First Copper Technology had a loss before interest and tax, and actually shrunk its revenue by 11%, 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$76m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through NT$147m of cash over the last year. So to be blunt we think it is risky. 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. Be aware that First Copper Technology is showing 2 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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