Promise Technology (TPE:3057) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Promise Technology, Inc. (TPE:3057) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Promise Technology

What Is Promise Technology's Net Debt?

As you can see below, Promise Technology had NT$456.0m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have NT$481.5m in cash offsetting this, leading to net cash of NT$25.5m.

A Look At Promise Technology's Liabilities

According to the last reported balance sheet, Promise Technology had liabilities of NT$582.5m due within 12 months, and liabilities of NT$168.3m due beyond 12 months. On the other hand, it had cash of NT$481.5m and NT$136.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$133.3m.

Of course, Promise Technology has a market capitalization of NT$995.4m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Promise Technology also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Promise Technology will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Promise Technology made a loss at the EBIT level, and saw its revenue drop to NT$963m, which is a fall of 23%. To be frank that doesn't bode well.

So How Risky Is Promise Technology?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Promise Technology had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through NT$115m of cash and made a loss of NT$58m. However, it has net cash of NT$25.5m, so it has a bit of time before it will need more capital. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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 Promise Technology has 3 warning signs (and 1 which shouldn't be ignored) we think 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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