Catcher Technology (TPE:2474) Could Easily Take On More 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. We can see that Catcher Technology Co., Ltd. (TPE:2474) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Catcher Technology

What Is Catcher Technology's Net Debt?

The chart below, which you can click on for greater detail, shows that Catcher Technology had NT$70.5b in debt in December 2020; about the same as the year before. But it also has NT$177.6b in cash to offset that, meaning it has NT$107.1b net cash.

How Healthy Is Catcher Technology's Balance Sheet?

The latest balance sheet data shows that Catcher Technology had liabilities of NT$91.5b due within a year, and liabilities of NT$6.37b falling due after that. Offsetting this, it had NT$177.6b in cash and NT$17.7b in receivables that were due within 12 months. So it can boast NT$97.4b more liquid assets than total liabilities.

This luscious liquidity implies that Catcher Technology's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Catcher Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Catcher Technology grew its EBIT by 5.8% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Catcher Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Catcher 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. Over the last three years, Catcher Technology recorded free cash flow worth a fulsome 96% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Catcher Technology has NT$107.1b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 96% of that EBIT to free cash flow, bringing in NT$19b. The bottom line is that we do not find Catcher Technology's debt levels at all concerning. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Catcher Technology (of which 1 makes us a bit uncomfortable!) you should know about.

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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