Stock Analysis

We Think Electric Power Technology (GTSM:4529) Has A Fair Chunk Of Debt

TPEX:4529
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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.' 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. As with many other companies Electric Power Technology Limited (GTSM:4529) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Electric Power Technology

What Is Electric Power Technology's Debt?

As you can see below, Electric Power Technology had NT$256.3m of debt at December 2020, down from NT$278.3m a year prior. However, it also had NT$6.18m in cash, and so its net debt is NT$250.1m.

debt-equity-history-analysis
GTSM:4529 Debt to Equity History April 21st 2021

How Healthy Is Electric Power Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Electric Power Technology had liabilities of NT$217.1m due within 12 months and liabilities of NT$68.5m due beyond that. Offsetting this, it had NT$6.18m in cash and NT$6.99m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$272.5m.

This deficit isn't so bad because Electric Power Technology is worth NT$697.5m, 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Electric Power Technology 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.

In the last year Electric Power Technology had a loss before interest and tax, and actually shrunk its revenue by 4.7%, to NT$7.9m. That's not what we would hope to see.

Caveat Emptor

Importantly, Electric Power Technology had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable NT$120m 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. However, it doesn't help that it burned through NT$125m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Electric Power Technology is showing 5 warning signs in our investment analysis , and 3 of those make us uncomfortable...

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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