Health Check: How Prudently Does GT Steel Construction Group (HKG:8402) Use Debt?

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.' 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 can see that GT Steel Construction Group Limited (HKG:8402) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 GT Steel Construction Group

What Is GT Steel Construction Group's Debt?

As you can see below, at the end of June 2021, GT Steel Construction Group had S$3.10m of debt, up from S$2.31m a year ago. Click the image for more detail. But on the other hand it also has S$3.61m in cash, leading to a S$512.3k net cash position.

A Look At GT Steel Construction Group's Liabilities

The latest balance sheet data shows that GT Steel Construction Group had liabilities of S$5.63m due within a year, and liabilities of S$3.37m falling due after that. On the other hand, it had cash of S$3.61m and S$20.1m worth of receivables due within a year. So it can boast S$14.7m more liquid assets than total liabilities.

This short term liquidity is a sign that GT Steel Construction Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that GT Steel Construction Group has more cash than debt is arguably a good indication that 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 GT Steel Construction Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year GT Steel Construction Group had a loss before interest and tax, and actually shrunk its revenue by 19%, to S$21m. That's not what we would hope to see.

So How Risky Is GT Steel Construction Group?

While GT Steel Construction Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow S$1.6m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that GT Steel Construction Group is showing 1 warning sign in our investment analysis , you should know about...

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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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.
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