Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies S-Tech Corp. (GTSM:1584) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for S-Tech
What Is S-Tech's Net Debt?
The image below, which you can click on for greater detail, shows that S-Tech had debt of NT$888.0m at the end of September 2020, a reduction from NT$954.4m over a year. However, it also had NT$69.1m in cash, and so its net debt is NT$818.9m.
A Look At S-Tech's Liabilities
Zooming in on the latest balance sheet data, we can see that S-Tech had liabilities of NT$492.1m due within 12 months and liabilities of NT$651.9m due beyond that. Offsetting this, it had NT$69.1m in cash and NT$179.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$895.6m.
This is a mountain of leverage relative to its market capitalization of NT$973.2m. 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 S-Tech'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, S-Tech reported revenue of NT$816m, which is a gain of 8.3%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Over the last twelve months S-Tech produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at NT$16m. 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. So we think its balance sheet is a little strained, though not beyond repair. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of NT$84m and the profit of NT$3.7m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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 3 warning signs for S-Tech you should be aware of, and 1 of them 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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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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About TPEX:1584
S-Tech
Engages in the manufacture and sale of nonferrous alloy products in Taiwan.
Excellent balance sheet with proven track record.
