Chernan Metal Industrial (GTSM:3631) Has Debt But No Earnings; Should You Worry?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Chernan Metal Industrial Corp. (GTSM:3631) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Chernan Metal Industrial

What Is Chernan Metal Industrial's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Chernan Metal Industrial had NT$517.3m of debt in September 2020, down from NT$596.5m, one year before. However, its balance sheet shows it holds NT$891.1m in cash, so it actually has NT$373.8m net cash.

How Strong Is Chernan Metal Industrial's Balance Sheet?

We can see from the most recent balance sheet that Chernan Metal Industrial had liabilities of NT$488.3m falling due within a year, and liabilities of NT$341.3m due beyond that. On the other hand, it had cash of NT$891.1m and NT$66.9m worth of receivables due within a year. So it actually has NT$128.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Chernan Metal Industrial could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Chernan Metal Industrial boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Chernan Metal Industrial'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, Chernan Metal Industrial made a loss at the EBIT level, and saw its revenue drop to NT$322m, which is a fall of 66%. That makes us nervous, to say the least.

So How Risky Is Chernan Metal Industrial?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Chernan Metal Industrial lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of NT$177m and booked a NT$17m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of NT$373.8m. That means it could keep spending at its current rate for more than two years. 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. For riskier companies like Chernan Metal Industrial I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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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