We Think Gold Rain Enterprises (GTSM:4503) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Gold Rain Enterprises Corp. (GTSM:4503) does use debt in its business. 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for Gold Rain Enterprises

What Is Gold Rain Enterprises's Net Debt?

As you can see below, Gold Rain Enterprises had NT$88.7m of debt at September 2020, down from NT$100.6m a year prior. On the flip side, it has NT$88.7m in cash leading to net debt of about NT$30.0k.

A Look At Gold Rain Enterprises' Liabilities

According to the last reported balance sheet, Gold Rain Enterprises had liabilities of NT$108.1m due within 12 months, and liabilities of NT$23.6m due beyond 12 months. On the other hand, it had cash of NT$88.7m and NT$49.6m worth of receivables due within a year. So it can boast NT$6.63m more liquid assets than total liabilities.

This state of affairs indicates that Gold Rain Enterprises' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the NT$624.3m company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, Gold Rain Enterprises has a very light debt load indeed. 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 Gold Rain Enterprises 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.

In the last year Gold Rain Enterprises had a loss before interest and tax, and actually shrunk its revenue by 30%, to NT$267m. That makes us nervous, to say the least.

Caveat Emptor

While Gold Rain Enterprises's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at NT$484k. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. And on top of that, it booked free cash flow of NT$53m and profit of NT$2.1m over the last year. This one is a bit too risky for our liking. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Gold Rain Enterprises that 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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