Is Global Standard Technology (KOSDAQ:083450) A Risky Investment?

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 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. Importantly, Global Standard Technology Co., Ltd (KOSDAQ:083450) does carry debt. 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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Global Standard Technology

What Is Global Standard Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Global Standard Technology had ₩4.83b of debt in September 2020, down from ₩5.87b, one year before. But it also has ₩45.1b in cash to offset that, meaning it has ₩40.3b net cash.

How Healthy Is Global Standard Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Global Standard Technology had liabilities of ₩23.1b due within 12 months and liabilities of ₩4.42b due beyond that. On the other hand, it had cash of ₩45.1b and ₩20.3b worth of receivables due within a year. So it can boast ₩37.9b more liquid assets than total liabilities.

This surplus suggests that Global Standard Technology is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Global Standard Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Global Standard Technology grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Global Standard Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Global Standard Technology 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. In the last three years, Global Standard Technology's free cash flow amounted to 41% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Global Standard Technology has ₩40.3b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 23% over the last year. So is Global Standard Technology's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Global Standard Technology's earnings per share history for free.

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. 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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