Lintes Technology (TPE:6715) Seems To Use Debt Rather Sparingly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Lintes Technology Co., Ltd. (TPE:6715) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Lintes Technology

What Is Lintes Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that Lintes Technology had NT$52.0m of debt in September 2020, down from NT$201.7m, one year before. However, its balance sheet shows it holds NT$832.3m in cash, so it actually has NT$780.4m net cash.

How Healthy Is Lintes Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Lintes Technology had liabilities of NT$744.1m due within 12 months and liabilities of NT$168.5m due beyond that. On the other hand, it had cash of NT$832.3m and NT$979.2m worth of receivables due within a year. So it can boast NT$898.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Lintes Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Lintes Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Lintes Technology grew its EBIT by 42% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Lintes Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Lintes Technology 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. Over the most recent three years, Lintes Technology recorded free cash flow worth 52% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Lintes Technology has NT$780.4m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 42% over the last year. So is Lintes Technology's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Lintes Technology that you should be aware of.

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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