Is Tripod Technology (TWSE:3044) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Tripod Technology Corporation (TWSE:3044) 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 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Tripod Technology

What Is Tripod Technology's Debt?

The image below, which you can click on for greater detail, shows that Tripod Technology had debt of NT$9.36b at the end of September 2023, a reduction from NT$16.4b over a year. But on the other hand it also has NT$24.6b in cash, leading to a NT$15.3b net cash position.

A Look At Tripod Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Tripod Technology had liabilities of NT$31.5b due within 12 months and liabilities of NT$4.40b due beyond that. Offsetting these obligations, it had cash of NT$24.6b as well as receivables valued at NT$19.1b due within 12 months. So it can boast NT$7.93b more liquid assets than total liabilities.

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

But the other side of the story is that Tripod Technology saw its EBIT decline by 7.4% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Tripod 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Tripod 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. During the last three years, Tripod Technology produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Tripod Technology has net cash of NT$15.3b, as well as more liquid assets than liabilities. The cherry on top was that in converted 72% of that EBIT to free cash flow, bringing in NT$13b. So we don't think Tripod Technology's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Tripod Technology is showing 1 warning sign in our investment analysis , 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.