Generalplus Technology (TPE:4952) Has A Rock Solid Balance Sheet

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. As with many other companies Generalplus Technology Inc. (TPE:4952) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Generalplus Technology

What Is Generalplus Technology's Net Debt?

The chart below, which you can click on for greater detail, shows that Generalplus Technology had NT$180.4m in debt in September 2020; about the same as the year before. But it also has NT$906.2m in cash to offset that, meaning it has NT$725.8m net cash.

How Healthy Is Generalplus Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Generalplus Technology had liabilities of NT$624.3m due within 12 months and liabilities of NT$136.3m due beyond that. Offsetting this, it had NT$906.2m in cash and NT$673.1m in receivables that were due within 12 months. So it actually has NT$818.8m more liquid assets than total liabilities.

This excess liquidity suggests that Generalplus Technology is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Generalplus Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Generalplus Technology's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Generalplus 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Generalplus Technology 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. Happily for any shareholders, Generalplus Technology actually produced more free cash flow than EBIT over the last three years. 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 Generalplus Technology has net cash of NT$725.8m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$134m, being 105% of its EBIT. So is Generalplus Technology'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. Like risks, for instance. Every company has them, and we've spotted 2 warning signs for Generalplus Technology (of which 1 makes us a bit uncomfortable!) you should know about.

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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