Jian Sin Industrial (GTSM:4502) Is Carrying A Fair Bit Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Jian Sin Industrial Co., Ltd. (GTSM:4502) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

Check out our latest analysis for Jian Sin Industrial

How Much Debt Does Jian Sin Industrial Carry?

The chart below, which you can click on for greater detail, shows that Jian Sin Industrial had NT$1.20b in debt in December 2020; about the same as the year before. However, because it has a cash reserve of NT$362.8m, its net debt is less, at about NT$832.9m.

How Strong Is Jian Sin Industrial's Balance Sheet?

We can see from the most recent balance sheet that Jian Sin Industrial had liabilities of NT$1.11b falling due within a year, and liabilities of NT$691.1m due beyond that. Offsetting these obligations, it had cash of NT$362.8m as well as receivables valued at NT$292.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$1.14b.

This deficit isn't so bad because Jian Sin Industrial is worth NT$2.17b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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$1.5b, which is a fall of 5.1%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Jian Sin Industrial produced an earnings before interest and tax (EBIT) loss. Indeed, it lost NT$76m 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. However, it doesn't help that it burned through NT$179m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Jian Sin Industrial (2 shouldn't be ignored!) that you should be aware of before investing here.

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.

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