New Advanced Electronics Technologies (GTSM:3465) Seems To Use Debt Quite Sensibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that New Advanced Electronics Technologies Co., Ltd. (GTSM:3465) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for New Advanced Electronics Technologies

How Much Debt Does New Advanced Electronics Technologies Carry?

As you can see below, at the end of December 2020, New Advanced Electronics Technologies had NT$71.2m of debt, up from none a year ago. Click the image for more detail. But it also has NT$112.6m in cash to offset that, meaning it has NT$41.4m net cash.

A Look At New Advanced Electronics Technologies' Liabilities

We can see from the most recent balance sheet that New Advanced Electronics Technologies had liabilities of NT$157.6m falling due within a year, and liabilities of NT$6.68m due beyond that. On the other hand, it had cash of NT$112.6m and NT$143.1m worth of receivables due within a year. So it can boast NT$91.5m more liquid assets than total liabilities.

Having regard to New Advanced Electronics Technologies' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the NT$6.99b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, New Advanced Electronics Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, New Advanced Electronics Technologies turned things around in the last 12 months, delivering and EBIT of NT$47m. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since New Advanced Electronics Technologies 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. New Advanced Electronics Technologies 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. Over the last year, New Advanced Electronics Technologies saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that New Advanced Electronics Technologies has net cash of NT$41.4m, as well as more liquid assets than liabilities. So we are not troubled with New Advanced Electronics Technologies's debt use. 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. For instance, we've identified 2 warning signs for New Advanced Electronics Technologies that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

When trading New Advanced Electronics Technologies or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.