Is Paragon Technologies (TPE:3518) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Paragon Technologies

How Much Debt Does Paragon Technologies Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Paragon Technologies had NT$603.2m of debt, an increase on NT$488.8m, over one year. But it also has NT$680.6m in cash to offset that, meaning it has NT$77.3m net cash.

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$630.4m due within 12 months and liabilities of NT$184.1m due beyond that. On the other hand, it had cash of NT$680.6m and NT$462.4m worth of receivables due within a year. So it can boast NT$328.5m more liquid assets than total liabilities.

This surplus suggests that Paragon Technologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Paragon Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Paragon Technologies turned things around in the last 12 months, delivering and EBIT of NT$10m. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Paragon Technologies 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. During the last year, Paragon Technologies burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Paragon Technologies has NT$77.3m in net cash and a decent-looking balance sheet. So we don't have any problem with Paragon Technologies'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. Be aware that Paragon Technologies is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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