Golden Friends (GTSM:4506) Has A Rock Solid Balance Sheet

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. We can see that Golden Friends Corporation (GTSM:4506) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Golden Friends

What Is Golden Friends's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Golden Friends had debt of NT$100.0m, up from none in one year. However, it does have NT$2.13b in cash offsetting this, leading to net cash of NT$2.03b.

How Healthy Is Golden Friends' Balance Sheet?

The latest balance sheet data shows that Golden Friends had liabilities of NT$3.19b due within a year, and liabilities of NT$69.2m falling due after that. Offsetting these obligations, it had cash of NT$2.13b as well as receivables valued at NT$951.7m due within 12 months. So it has liabilities totalling NT$172.6m more than its cash and near-term receivables, combined.

This state of affairs indicates that Golden Friends' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the NT$10.3b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Golden Friends boasts net cash, so it's fair to say it does not have a heavy debt load!

While Golden Friends doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Golden Friends can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Golden Friends 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. During the last three years, Golden Friends generated free cash flow amounting to a very robust 94% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Golden Friends has NT$2.03b in net cash. And it impressed us with free cash flow of NT$768m, being 94% of its EBIT. So we don't think Golden Friends's use of debt is risky. Given Golden Friends has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

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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