Getac Technology (TPE:3005) Seems To Use Debt Rather Sparingly

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Getac Technology Corporation (TPE:3005) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Getac Technology

What Is Getac Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Getac Technology had NT$2.52b of debt in December 2020, down from NT$2.63b, one year before. However, it does have NT$6.70b in cash offsetting this, leading to net cash of NT$4.18b.

How Strong Is Getac Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Getac Technology had liabilities of NT$11.7b due within 12 months and liabilities of NT$4.13b due beyond that. Offsetting these obligations, it had cash of NT$6.70b as well as receivables valued at NT$7.62b due within 12 months. So its liabilities total NT$1.54b more than the combination of its cash and short-term receivables.

Of course, Getac Technology has a market capitalization of NT$33.6b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Getac Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that Getac Technology has increased its EBIT by 4.7% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Getac 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Getac 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 most recent three years, Getac Technology recorded free cash flow worth 74% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

We could understand if investors are concerned about Getac Technology's liabilities, but we can be reassured by the fact it has has net cash of NT$4.18b. The cherry on top was that in converted 74% of that EBIT to free cash flow, bringing in NT$2.3b. So we don't think Getac Technology's use of debt is risky. 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 Getac Technology that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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