Is Calin Technology (TPE:4976) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Calin Technology

What Is Calin Technology's Debt?

The image below, which you can click on for greater detail, shows that Calin Technology had debt of NT$340.9m at the end of September 2020, a reduction from NT$391.9m over a year. But it also has NT$377.0m in cash to offset that, meaning it has NT$36.0m net cash.

How Strong Is Calin Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Calin Technology had liabilities of NT$402.2m due within 12 months and liabilities of NT$275.3m due beyond that. Offsetting this, it had NT$377.0m in cash and NT$419.0m in receivables that were due within 12 months. So it can boast NT$118.5m more liquid assets than total liabilities.

Having regard to Calin Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the NT$8.24b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Calin Technology boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, Calin Technology made a loss at the EBIT level, and saw its revenue drop to NT$1.1b, which is a fall of 17%. We would much prefer see growth.

So How Risky Is Calin Technology?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Calin Technology 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$205m and booked a NT$108m accounting loss. With only NT$36.0m on the balance sheet, it would appear that its going to need to raise capital again soon. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Calin Technology is showing 1 warning sign in our investment analysis , you should know about...

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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