Is Generalplus Technology (TWSE:4952) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. (TWSE:4952) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Generalplus Technology

What Is Generalplus Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Generalplus Technology had debt of NT$196.6m, up from NT$109.3m in one year. However, it does have NT$1.24b in cash offsetting this, leading to net cash of NT$1.04b.

A Look At Generalplus Technology's Liabilities

We can see from the most recent balance sheet that Generalplus Technology had liabilities of NT$938.0m falling due within a year, and liabilities of NT$170.0m due beyond that. Offsetting these obligations, it had cash of NT$1.24b as well as receivables valued at NT$565.3m due within 12 months. So it can boast NT$695.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Generalplus Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Generalplus Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Generalplus Technology saw its EBIT decline by 3.1% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Generalplus Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Generalplus Technology generated free cash flow amounting to a very robust 99% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Generalplus Technology has NT$1.04b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 99% of that EBIT to free cash flow, bringing in NT$442m. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Generalplus Technology that you should be aware of.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.