Would C.T.I. Traffic Industries (GTSM:2230) Be Better Off With Less Debt?

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.' 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 note that C.T.I. Traffic Industries Co., Ltd. (GTSM:2230) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

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

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

You can click the graphic below for the historical numbers, but it shows that as of December 2020 C.T.I. Traffic Industries had NT$322.2m of debt, an increase on NT$284.0m, over one year. On the flip side, it has NT$198.7m in cash leading to net debt of about NT$123.5m.

How Healthy Is C.T.I. Traffic Industries' Balance Sheet?

We can see from the most recent balance sheet that C.T.I. Traffic Industries had liabilities of NT$407.6m falling due within a year, and liabilities of NT$27.2m due beyond that. On the other hand, it had cash of NT$198.7m and NT$130.7m worth of receivables due within a year. So it has liabilities totalling NT$105.3m more than its cash and near-term receivables, combined.

Of course, C.T.I. Traffic Industries has a market capitalization of NT$742.4m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since C.T.I. Traffic Industries will need earnings to service that debt. 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.

Over 12 months, C.T.I. Traffic Industries made a loss at the EBIT level, and saw its revenue drop to NT$478m, which is a fall of 12%. That's not what we would hope to see.

Caveat Emptor

Not only did C.T.I. Traffic Industries's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost NT$21m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of NT$19m. So we do think this stock is quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with C.T.I. Traffic Industries (at least 2 which are significant) , and understanding them should be part of your investment process.

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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