Is Calin Technology (TPE:4976) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Calin Technology Co., Ltd. (TPE:4976) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Calin Technology

What Is Calin Technology's Debt?

As you can see below, Calin Technology had NT$318.9m of debt at December 2020, down from NT$407.0m a year prior. But on the other hand it also has NT$367.6m in cash, leading to a NT$48.6m net cash position.

How Strong Is Calin Technology's Balance Sheet?

According to the last reported balance sheet, Calin Technology had liabilities of NT$475.6m due within 12 months, and liabilities of NT$260.4m due beyond 12 months. Offsetting this, it had NT$367.6m in cash and NT$482.0m in receivables that were due within 12 months. So it actually has NT$113.5m more liquid assets than total liabilities.

This state of affairs indicates that Calin Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the NT$10.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Calin Technology 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 you can't view debt in total isolation; since Calin 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.

In the last year Calin Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to NT$1.4b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Calin Technology?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Calin Technology had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of NT$202m and booked a NT$57m accounting loss. Given it only has net cash of NT$48.6m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Calin Technology (including 1 which shouldn't be ignored) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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