Trinity Precision Technology (GTSM:4534) Is Making Moderate Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Trinity Precision Technology Co., Ltd. (GTSM:4534) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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.

See our latest analysis for Trinity Precision Technology

How Much Debt Does Trinity Precision Technology Carry?

The image below, which you can click on for greater detail, shows that Trinity Precision Technology had debt of NT$427.3m at the end of September 2020, a reduction from NT$457.3m over a year. However, it also had NT$363.3m in cash, and so its net debt is NT$64.0m.

A Look At Trinity Precision Technology's Liabilities

We can see from the most recent balance sheet that Trinity Precision Technology had liabilities of NT$663.0m falling due within a year, and liabilities of NT$39.6m due beyond that. Offsetting this, it had NT$363.3m in cash and NT$332.7m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Trinity Precision Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the NT$854.9m company is short on cash, but still worth keeping an eye on the balance sheet. There's no doubt that we learn most about debt from the balance sheet. But it is Trinity Precision Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Trinity Precision Technology had a loss before interest and tax, and actually shrunk its revenue by 21%, to NT$1.1b. That makes us nervous, to say the least.

Caveat Emptor

While Trinity Precision Technology's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost NT$46m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of NT$50m. So in short it's a really risky stock. 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 example Trinity Precision Technology has 3 warning signs (and 1 which is a bit concerning) we think you should know about.

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.

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