Is Qualipoly Chemical (TPE:4722) 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Qualipoly Chemical Corporation (TPE:4722) makes use of debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Qualipoly Chemical

How Much Debt Does Qualipoly Chemical Carry?

The image below, which you can click on for greater detail, shows that Qualipoly Chemical had debt of NT$90.8m at the end of December 2020, a reduction from NT$242.9m over a year. However, its balance sheet shows it holds NT$287.5m in cash, so it actually has NT$196.7m net cash.

How Strong Is Qualipoly Chemical's Balance Sheet?

The latest balance sheet data shows that Qualipoly Chemical had liabilities of NT$643.7m due within a year, and liabilities of NT$102.0m falling due after that. Offsetting this, it had NT$287.5m in cash and NT$998.5m in receivables that were due within 12 months. So it actually has NT$540.4m more liquid assets than total liabilities.

This excess liquidity suggests that Qualipoly Chemical is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Qualipoly Chemical has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Qualipoly Chemical has increased its EBIT by 5.7% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Qualipoly Chemical can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Qualipoly Chemical 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. Over the last three years, Qualipoly Chemical actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Qualipoly Chemical has net cash of NT$196.7m, as well as more liquid assets than liabilities. The cherry on top was that in converted 113% of that EBIT to free cash flow, bringing in NT$414m. So is Qualipoly Chemical's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Qualipoly Chemical (1 can't be ignored!) that you should be aware of before investing here.

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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