Is GLOBAL TEK FABRICATION (TPE:4566) A Risky Investment?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that GLOBAL TEK FABRICATION CO., Ltd. (TPE:4566) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for GLOBAL TEK FABRICATION

What Is GLOBAL TEK FABRICATION's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 GLOBAL TEK FABRICATION had debt of NT$1.41b, up from NT$1.16b in one year. However, it does have NT$1.49b in cash offsetting this, leading to net cash of NT$78.1m.

How Healthy Is GLOBAL TEK FABRICATION's Balance Sheet?

The latest balance sheet data shows that GLOBAL TEK FABRICATION had liabilities of NT$1.50b due within a year, and liabilities of NT$1.20b falling due after that. Offsetting these obligations, it had cash of NT$1.49b as well as receivables valued at NT$1.00b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$207.8m.

Given GLOBAL TEK FABRICATION has a market capitalization of NT$4.60b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, GLOBAL TEK FABRICATION also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, GLOBAL TEK FABRICATION saw its EBIT drop by 9.1% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine GLOBAL TEK FABRICATION's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. GLOBAL TEK FABRICATION may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, GLOBAL TEK FABRICATION recorded free cash flow of 22% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

We could understand if investors are concerned about GLOBAL TEK FABRICATION's liabilities, but we can be reassured by the fact it has has net cash of NT$78.1m. So we are not troubled with GLOBAL TEK FABRICATION's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for GLOBAL TEK FABRICATION you should be aware of.

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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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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