These 4 Measures Indicate That Topoint Technology (TPE:8021) Is Using Debt Safely

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. As with many other companies Topoint Technology Co., Ltd. (TPE:8021) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Topoint Technology

What Is Topoint Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Topoint Technology had NT$485.9m of debt in September 2020, down from NT$526.9m, one year before. But it also has NT$2.54b in cash to offset that, meaning it has NT$2.05b net cash.

How Strong Is Topoint Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Topoint Technology had liabilities of NT$973.7m due within 12 months and liabilities of NT$531.2m due beyond that. Offsetting these obligations, it had cash of NT$2.54b as well as receivables valued at NT$1.11b due within 12 months. So it actually has NT$2.15b more liquid assets than total liabilities.

This luscious liquidity implies that Topoint Technology's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Topoint Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Topoint Technology has boosted its EBIT by 40%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Topoint Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Topoint 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 last three years, Topoint Technology actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Topoint Technology has NT$2.05b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 135% of that EBIT to free cash flow, bringing in NT$681m. The bottom line is that Topoint Technology's use of debt is absolutely fine. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Topoint Technology (of which 1 is potentially serious!) you should know about.

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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