Is Infortrend Technology (TPE:2495) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Infortrend Technology, Inc. (TPE:2495) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Infortrend Technology

What Is Infortrend Technology's Net Debt?

As you can see below, Infortrend Technology had NT$695.0m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has NT$2.35b in cash to offset that, meaning it has NT$1.65b net cash.

How Strong Is Infortrend Technology's Balance Sheet?

We can see from the most recent balance sheet that Infortrend Technology had liabilities of NT$912.7m falling due within a year, and liabilities of NT$83.3m due beyond that. On the other hand, it had cash of NT$2.35b and NT$251.3m worth of receivables due within a year. So it can boast NT$1.60b more liquid assets than total liabilities.

This surplus liquidity suggests that Infortrend Technology's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, Infortrend Technology boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Infortrend 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.

Over 12 months, Infortrend Technology made a loss at the EBIT level, and saw its revenue drop to NT$1.2b, which is a fall of 17%. That's not what we would hope to see.

So How Risky Is Infortrend Technology?

Although Infortrend Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of NT$98m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. Like risks, for instance. Every company has them, and we've spotted 2 warning signs for Infortrend Technology (of which 1 is a bit unpleasant!) 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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