Is Her Chee Industrial (GTSM:8937) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Her Chee Industrial Co., Ltd. (GTSM:8937) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 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 Her Chee Industrial

What Is Her Chee Industrial's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Her Chee Industrial had debt of NT$61.0m, up from none in one year. But on the other hand it also has NT$336.7m in cash, leading to a NT$275.7m net cash position.

A Look At Her Chee Industrial's Liabilities

Zooming in on the latest balance sheet data, we can see that Her Chee Industrial had liabilities of NT$161.5m due within 12 months and liabilities of NT$8.54m due beyond that. On the other hand, it had cash of NT$336.7m and NT$15.5m worth of receivables due within a year. So it can boast NT$182.2m more liquid assets than total liabilities.

This excess liquidity suggests that Her Chee Industrial is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Her Chee Industrial has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Her Chee Industrial will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Her Chee Industrial saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

So How Risky Is Her Chee Industrial?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Her Chee Industrial had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of NT$53m and booked a NT$22m accounting loss. With only NT$275.7m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. To that end, you should learn about the 2 warning signs we've spotted with Her Chee Industrial (including 1 which is is concerning) .

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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