These 4 Measures Indicate That INPAQ Technology (GTSM:6284) Is Using Debt Reasonably Well

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 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. As with many other companies INPAQ Technology Co., Ltd. (GTSM:6284) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for INPAQ Technology

What Is INPAQ Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 INPAQ Technology had NT$482.3m of debt, an increase on NT$333.2m, over one year. But it also has NT$1.45b in cash to offset that, meaning it has NT$965.8m net cash.

How Strong Is INPAQ Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that INPAQ Technology had liabilities of NT$1.84b due within 12 months and liabilities of NT$544.2m due beyond that. Offsetting this, it had NT$1.45b in cash and NT$1.97b in receivables that were due within 12 months. So it can boast NT$1.03b more liquid assets than total liabilities.

This surplus suggests that INPAQ Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, INPAQ Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that INPAQ Technology grew its EBIT by 153% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is INPAQ Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. INPAQ 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. Considering the last three years, INPAQ Technology actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that INPAQ Technology has net cash of NT$965.8m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 153% over the last year. So is INPAQ 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. Be aware that INPAQ Technology is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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