Alltop Technology (GTSM:3526) Seems To Use Debt Rather Sparingly

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 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. We note that Alltop Technology Co., Ltd. (GTSM:3526) does have debt on its balance sheet. 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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Alltop Technology

What Is Alltop Technology's Debt?

As you can see below, Alltop Technology had NT$504.6m of debt at September 2020, down from NT$1.25b a year prior. However, its balance sheet shows it holds NT$1.24b in cash, so it actually has NT$738.5m net cash.

A Look At Alltop Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Alltop Technology had liabilities of NT$594.3m due within 12 months and liabilities of NT$545.2m due beyond that. Offsetting these obligations, it had cash of NT$1.24b as well as receivables valued at NT$863.0m due within 12 months. So it can boast NT$966.6m more liquid assets than total liabilities.

It's good to see that Alltop Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. 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 Alltop Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Alltop Technology has boosted its EBIT by 65%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Alltop Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Alltop 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. During the last three years, Alltop Technology produced sturdy free cash flow equating to 73% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Alltop Technology has NT$738.5m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 65% over the last year. So is Alltop Technology's debt a risk? It doesn't seem so to us. 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. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for Alltop Technology 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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