We Think Global SM Tech (KOSDAQ:900070) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Global SM Tech Limited (KOSDAQ:900070) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Global SM Tech

What Is Global SM Tech's Debt?

The image below, which you can click on for greater detail, shows that Global SM Tech had debt of ₩10.1b at the end of December 2020, a reduction from ₩11.1b over a year. However, its balance sheet shows it holds ₩23.5b in cash, so it actually has ₩13.3b net cash.

A Look At Global SM Tech's Liabilities

We can see from the most recent balance sheet that Global SM Tech had liabilities of ₩26.4b falling due within a year, and liabilities of ₩17.6b due beyond that. Offsetting these obligations, it had cash of ₩23.5b as well as receivables valued at ₩41.4b due within 12 months. So it can boast ₩20.8b more liquid assets than total liabilities.

This excess liquidity is a great indication that Global SM Tech's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Global SM Tech has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Global SM Tech grew its EBIT by 18% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is Global SM Tech'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Global SM Tech may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Global SM Tech actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Global SM Tech has ₩13.3b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 140% of that EBIT to free cash flow, bringing in ₩8.6b. So we don't think Global SM Tech's use of debt is risky. 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. For example, we've discovered 4 warning signs for Global SM Tech (1 is potentially serious!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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