Is Infortrend Technology (TPE:2495) 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.' 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. We can see that Infortrend Technology, Inc. (TPE:2495) does use debt in its business. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See our latest analysis for Infortrend Technology

How Much Debt Does Infortrend Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Infortrend Technology had NT$850.0m of debt, an increase on NT$655.0m, over one year. But on the other hand it also has NT$2.49b in cash, leading to a NT$1.64b net cash position.

A Look At Infortrend Technology's Liabilities

We can see from the most recent balance sheet that Infortrend Technology had liabilities of NT$1.07b falling due within a year, and liabilities of NT$87.2m due beyond that. Offsetting this, it had NT$2.49b in cash and NT$286.2m in receivables that were due within 12 months. So it can boast NT$1.62b more liquid assets than total liabilities.

This luscious liquidity implies that Infortrend Technology's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Infortrend Technology has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Infortrend Technology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Infortrend Technology had a loss before interest and tax, and actually shrunk its revenue by 18%, to NT$1.1b. That's not what we would hope to see.

So How Risky Is Infortrend Technology?

While Infortrend Technology lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow NT$117m. 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. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. Case in point: We've spotted 2 warning signs for Infortrend Technology you should be aware of, and 1 of them is a bit concerning.

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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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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