Does ALFOT Technologies (GTSM:4553) Have A Healthy Balance Sheet?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that ALFOT Technologies Co., Ltd. (GTSM:4553) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for ALFOT Technologies

How Much Debt Does ALFOT Technologies Carry?

The image below, which you can click on for greater detail, shows that at June 2020 ALFOT Technologies had debt of NT$454.3m, up from NT$369.2m in one year. However, because it has a cash reserve of NT$111.9m, its net debt is less, at about NT$342.4m.

A Look At ALFOT Technologies's Liabilities

According to the last reported balance sheet, ALFOT Technologies had liabilities of NT$391.5m due within 12 months, and liabilities of NT$183.4m due beyond 12 months. Offsetting this, it had NT$111.9m in cash and NT$63.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$400.0m.

This deficit is considerable relative to its market capitalization of NT$574.2m, so it does suggest shareholders should keep an eye on ALFOT Technologies's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is ALFOT Technologies'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.

Over 12 months, ALFOT Technologies made a loss at the EBIT level, and saw its revenue drop to NT$522m, which is a fall of 13%. That's not what we would hope to see.

Caveat Emptor

Not only did ALFOT Technologies's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping NT$69m. 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. Another cause for caution is that is bled NT$114m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Be aware that ALFOT Technologies is showing 4 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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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