Is Jian Sin Industrial (GTSM:4502) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Jian Sin Industrial Co., Ltd. (GTSM:4502) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Jian Sin Industrial

What Is Jian Sin Industrial's Net Debt?

As you can see below, at the end of September 2020, Jian Sin Industrial had NT$1.33b of debt, up from NT$1.16b a year ago. Click the image for more detail. However, because it has a cash reserve of NT$242.5m, its net debt is less, at about NT$1.09b.

A Look At Jian Sin Industrial's Liabilities

The latest balance sheet data shows that Jian Sin Industrial had liabilities of NT$1.09b due within a year, and liabilities of NT$568.9m falling due after that. On the other hand, it had cash of NT$242.5m and NT$383.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$1.04b.

This deficit isn't so bad because Jian Sin Industrial is worth NT$2.38b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Jian Sin Industrial'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.

Over 12 months, Jian Sin Industrial made a loss at the EBIT level, and saw its revenue drop to NT$1.3b, which is a fall of 25%. To be frank that doesn't bode well.

Caveat Emptor

While Jian Sin Industrial's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost NT$88m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled NT$194m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. 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 Jian Sin Industrial (at least 2 which are a bit concerning) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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