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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that INPAQ Technology Co., Ltd. (GTSM:6284) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for INPAQ Technology

How Much Debt Does INPAQ Technology Carry?

As you can see below, at the end of September 2020, INPAQ Technology had NT$570.8m of debt, up from NT$333.2m a year ago. Click the image for more detail. But on the other hand it also has NT$1.66b in cash, leading to a NT$1.09b net cash position.

A Look At INPAQ Technology's Liabilities

According to the last reported balance sheet, INPAQ Technology had liabilities of NT$1.84b due within 12 months, and liabilities of NT$544.2m due beyond 12 months. Offsetting these obligations, it had cash of NT$1.66b as well as receivables valued at NT$1.97b due within 12 months. So it can boast NT$1.24b more liquid assets than total liabilities.

This short term liquidity is a sign that INPAQ Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 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. While INPAQ 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. Over the last three years, INPAQ Technology recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that INPAQ Technology has net cash of NT$1.09b, as well as more liquid assets than liabilities. And we liked the look of last year's 153% year-on-year EBIT growth. So is INPAQ Technology's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for INPAQ Technology 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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