Giantplus Technology (TPE:8105) Has Debt But No Earnings; Should You Worry?

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.' 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 can see that Giantplus Technology Co., Ltd. (TPE:8105) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Giantplus Technology

How Much Debt Does Giantplus Technology Carry?

You can click the graphic below for the historical numbers, but it shows that Giantplus Technology had NT$1.20b of debt in September 2020, down from NT$1.32b, one year before. But on the other hand it also has NT$1.53b in cash, leading to a NT$329.9m net cash position.

How Healthy Is Giantplus Technology's Balance Sheet?

We can see from the most recent balance sheet that Giantplus Technology had liabilities of NT$2.72b falling due within a year, and liabilities of NT$786.6m due beyond that. On the other hand, it had cash of NT$1.53b and NT$1.38b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$603.1m.

Of course, Giantplus Technology has a market capitalization of NT$5.32b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Giantplus Technology also has more cash than debt, so we're pretty confident 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 Giantplus 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, Giantplus Technology made a loss at the EBIT level, and saw its revenue drop to NT$7.2b, which is a fall of 18%. That's not what we would hope to see.

So How Risky Is Giantplus Technology?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Giantplus Technology lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of NT$441m and booked a NT$1.6b accounting loss. With only NT$329.9m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For example, we've discovered 1 warning sign for Giantplus Technology that you should be aware of before investing here.

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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