We Think C.T.I. Traffic Industries (GTSM:2230) Has A Fair Chunk Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that C.T.I. Traffic Industries Co., Ltd. (GTSM:2230) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for C.T.I. Traffic Industries

What Is C.T.I. Traffic Industries's Net Debt?

As you can see below, at the end of September 2020, C.T.I. Traffic Industries had NT$316.8m of debt, up from NT$277.0m a year ago. Click the image for more detail. However, it also had NT$171.3m in cash, and so its net debt is NT$145.4m.

A Look At C.T.I. Traffic Industries' Liabilities

According to the last reported balance sheet, C.T.I. Traffic Industries had liabilities of NT$388.6m due within 12 months, and liabilities of NT$28.6m due beyond 12 months. Offsetting this, it had NT$171.3m in cash and NT$115.9m in receivables that were due within 12 months. So its liabilities total NT$130.0m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because C.T.I. Traffic Industries is worth NT$552.8m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is C.T.I. Traffic Industries'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.

In the last year C.T.I. Traffic Industries had a loss before interest and tax, and actually shrunk its revenue by 9.5%, to NT$480m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months C.T.I. Traffic Industries produced an earnings before interest and tax (EBIT) loss. Indeed, it lost NT$11m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of NT$16m. So we do think this stock is quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with C.T.I. Traffic Industries (at least 2 which shouldn't be ignored) , 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.

When trading C.T.I. Traffic Industries or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.