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, TPV Technology Co., Ltd. (SZSE:000727) does carry debt. But should shareholders be worried about its use of debt?
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. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for TPV Technology
What Is TPV Technology’s Net Debt?
As you can see below, TPV Technology had CNÂ¥3.35b of debt at June 2024, down from CNÂ¥3.56b a year prior. However, its balance sheet shows it holds CNÂ¥4.66b in cash, so it actually has CNÂ¥1.31b net cash.
SZSE:000727 Debt to Equity History October 28th 2024 How Healthy Is TPV Technology’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that TPV Technology had liabilities of CNÂ¥25.5b due within 12 months and liabilities of CNÂ¥1.19b due beyond that. Offsetting these obligations, it had cash of CNÂ¥4.66b as well as receivables valued at CNÂ¥10.6b due within 12 months. So it has liabilities totalling CNÂ¥11.4b more than its cash and near-term receivables, combined.
When you consider that this deficiency exceeds the company’s CNÂ¥10.9b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Given that TPV Technology has more cash than debt, we’re pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.
And we also note warmly that TPV Technology grew its EBIT by 12% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is TPV Technology’s earnings that will influence how the balance sheet holds up in the future. 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don’t cut it. While TPV 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, TPV Technology recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing Up
While TPV Technology does have more liabilities than liquid assets, it also has net cash of CNÂ¥1.31b. So we don’t have any problem with TPV Technology’s use of debt. 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. We’ve identified 1 warning sign with TPV Technology , and understanding them should be part of your investment process.
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.
Discover if TPV Technology might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.