Is Paragon Technologies (TPE:3518) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Paragon Technologies Co., Ltd. (TPE:3518) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Paragon Technologies

What Is Paragon Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Paragon Technologies had NT$603.7m of debt, an increase on NT$451.3m, over one year. However, it does have NT$751.5m in cash offsetting this, leading to net cash of NT$147.8m.

How Strong Is Paragon Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Paragon Technologies had liabilities of NT$562.8m due within 12 months and liabilities of NT$228.4m due beyond that. Offsetting these obligations, it had cash of NT$751.5m as well as receivables valued at NT$408.7m due within 12 months. So it can boast NT$369.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Paragon Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Paragon Technologies 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 it is Paragon Technologies's earnings that will influence how the balance sheet holds up in the future. 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, Paragon Technologies reported revenue of NT$621m, which is a gain of 17%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Paragon Technologies?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Paragon Technologies had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of NT$139m and booked a NT$159m accounting loss. But the saving grace is the NT$147.8m on the balance sheet. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. For example, we've discovered 1 warning sign for Paragon Technologies that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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