Does Top Bright Holding (TPE:8499) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Top Bright Holding Co., Ltd. (TPE:8499) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Top Bright Holding

What Is Top Bright Holding's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Top Bright Holding had NT$632.2m of debt, an increase on NT$41.1m, over one year. But it also has NT$1.35b in cash to offset that, meaning it has NT$714.6m net cash.

A Look At Top Bright Holding's Liabilities

We can see from the most recent balance sheet that Top Bright Holding had liabilities of NT$492.2m falling due within a year, and liabilities of NT$847.0m due beyond that. Offsetting this, it had NT$1.35b in cash and NT$820.0m in receivables that were due within 12 months. So it actually has NT$827.6m more liquid assets than total liabilities.

This surplus suggests that Top Bright Holding has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Top Bright Holding has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Top Bright Holding grew its EBIT by 48% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Top Bright Holding 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Top Bright Holding 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. Looking at the most recent three years, Top Bright Holding recorded free cash flow of 45% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Top Bright Holding has NT$714.6m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 48% over the last year. So is Top Bright Holding'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. Take risks, for example - Top Bright Holding has 2 warning signs (and 1 which can't be ignored) we think 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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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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