Is Shieh Yih Machinery Industry (GTSM:4533) Using Too Much Debt?

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 Shieh Yih Machinery Industry Co., Ltd. (GTSM:4533) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Shieh Yih Machinery Industry

How Much Debt Does Shieh Yih Machinery Industry Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Shieh Yih Machinery Industry had NT$1.54b of debt, an increase on NT$1.02b, over one year. But it also has NT$2.49b in cash to offset that, meaning it has NT$946.6m net cash.

How Healthy Is Shieh Yih Machinery Industry's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shieh Yih Machinery Industry had liabilities of NT$1.86b due within 12 months and liabilities of NT$1.21b due beyond that. Offsetting these obligations, it had cash of NT$2.49b as well as receivables valued at NT$404.5m due within 12 months. So its liabilities total NT$176.1m more than the combination of its cash and short-term receivables.

Since publicly traded Shieh Yih Machinery Industry shares are worth a total of NT$1.78b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Shieh Yih Machinery Industry also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Shieh Yih Machinery Industry 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.

Over 12 months, Shieh Yih Machinery Industry made a loss at the EBIT level, and saw its revenue drop to NT$3.0b, which is a fall of 10%. We would much prefer see growth.

So How Risky Is Shieh Yih Machinery Industry?

While Shieh Yih Machinery Industry lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of NT$20m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Shieh Yih Machinery Industry is showing 5 warning signs in our investment analysis , and 2 of those don't sit too well with us...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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