Asia Neo Tech IndustrialLtd (GTSM:4542) Seems To Use Debt Quite Sensibly

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. As with many other companies Asia Neo Tech Industrial Co.,Ltd. (GTSM:4542) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

View our latest analysis for Asia Neo Tech IndustrialLtd

What Is Asia Neo Tech IndustrialLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Asia Neo Tech IndustrialLtd had debt of NT$190.9m, up from NT$98.5m in one year. But it also has NT$396.5m in cash to offset that, meaning it has NT$205.5m net cash.

A Look At Asia Neo Tech IndustrialLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Asia Neo Tech IndustrialLtd had liabilities of NT$328.0m due within 12 months and liabilities of NT$113.2m due beyond that. On the other hand, it had cash of NT$396.5m and NT$187.2m worth of receivables due within a year. So it actually has NT$142.6m more liquid assets than total liabilities.

This excess liquidity suggests that Asia Neo Tech IndustrialLtd is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Asia Neo Tech IndustrialLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Asia Neo Tech IndustrialLtd's load is not too heavy, because its EBIT was down 31% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is Asia Neo Tech IndustrialLtd'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Asia Neo Tech IndustrialLtd 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. In the last three years, Asia Neo Tech IndustrialLtd created free cash flow amounting to 17% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Asia Neo Tech IndustrialLtd has NT$205.5m in net cash and a decent-looking balance sheet. So we are not troubled with Asia Neo Tech IndustrialLtd's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Asia Neo Tech IndustrialLtd that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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