Is Chaintech Technology (TPE:2425) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Chaintech Technology Corporation (TPE:2425) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 Chaintech Technology

What Is Chaintech Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Chaintech Technology had NT$402.0m of debt, an increase on NT$156.6m, over one year. But it also has NT$567.8m in cash to offset that, meaning it has NT$165.7m net cash.

How Healthy Is Chaintech Technology's Balance Sheet?

We can see from the most recent balance sheet that Chaintech Technology had liabilities of NT$960.4m falling due within a year, and liabilities of NT$17.5m due beyond that. On the other hand, it had cash of NT$567.8m and NT$1.34b worth of receivables due within a year. So it can boast NT$927.1m more liquid assets than total liabilities.

It's good to see that Chaintech Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Chaintech Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Chaintech Technology has boosted its EBIT by 74%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is Chaintech 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. Chaintech 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. In the last three years, Chaintech Technology's free cash flow amounted to 36% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Chaintech Technology has net cash of NT$165.7m, as well as more liquid assets than liabilities. And we liked the look of last year's 74% year-on-year EBIT growth. So we don't think Chaintech Technology's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Chaintech Technology you should know about.

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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This article by Simply Wall St is general in nature. 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.
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