These 4 Measures Indicate That Asia Neo Tech IndustrialLtd (GTSM:4542) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Asia Neo Tech Industrial Co.,Ltd. (GTSM:4542) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Asia Neo Tech IndustrialLtd

What Is Asia Neo Tech IndustrialLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Asia Neo Tech IndustrialLtd had NT$189.0m of debt, an increase on NT$96.6m, over one year. However, it does have NT$424.6m in cash offsetting this, leading to net cash of NT$235.6m.

A Look At Asia Neo Tech IndustrialLtd's Liabilities

We can see from the most recent balance sheet that Asia Neo Tech IndustrialLtd had liabilities of NT$361.8m falling due within a year, and liabilities of NT$109.7m due beyond that. Offsetting these obligations, it had cash of NT$424.6m as well as receivables valued at NT$169.4m due within 12 months. So it actually has NT$122.5m more liquid assets than total liabilities.

This excess liquidity suggests that Asia Neo Tech IndustrialLtd is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues 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 52% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Asia Neo Tech IndustrialLtd will need earnings to service that debt. 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. Over the last three years, Asia Neo Tech IndustrialLtd recorded free cash flow worth a fulsome 99% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Asia Neo Tech IndustrialLtd has NT$235.6m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$51m, being 99% of its EBIT. So we don't think Asia Neo Tech IndustrialLtd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with Asia Neo Tech IndustrialLtd .

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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