Is Compucase Enterprise (TPE:3032) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Compucase Enterprise Co., Ltd. (TPE:3032) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Compucase Enterprise

How Much Debt Does Compucase Enterprise Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Compucase Enterprise had debt of NT$2.05b, up from NT$1.76b in one year. However, it does have NT$2.52b in cash offsetting this, leading to net cash of NT$464.5m.

A Look At Compucase Enterprise's Liabilities

The latest balance sheet data shows that Compucase Enterprise had liabilities of NT$5.60b due within a year, and liabilities of NT$113.6m falling due after that. Offsetting these obligations, it had cash of NT$2.52b as well as receivables valued at NT$2.97b due within 12 months. So it has liabilities totalling NT$226.8m more than its cash and near-term receivables, combined.

Of course, Compucase Enterprise has a market capitalization of NT$5.03b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Compucase Enterprise also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Compucase Enterprise grew its EBIT by 125% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Compucase Enterprise'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Compucase Enterprise 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, Compucase Enterprise created free cash flow amounting to 6.1% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Compucase Enterprise has NT$464.5m in net cash. And it impressed us with its EBIT growth of 125% over the last year. So we don't have any problem with Compucase Enterprise's use of debt. 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. Case in point: We've spotted 2 warning signs for Compucase Enterprise you should be aware of.

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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