Here's Why Quaser Machine Tools (GTSM:4563) Can Afford Some Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Quaser Machine Tools, Inc. (GTSM:4563) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Quaser Machine Tools

What Is Quaser Machine Tools's Debt?

The image below, which you can click on for greater detail, shows that Quaser Machine Tools had debt of NT$1.73b at the end of December 2020, a reduction from NT$2.37b over a year. However, it does have NT$814.6m in cash offsetting this, leading to net debt of about NT$915.7m.

How Strong Is Quaser Machine Tools' Balance Sheet?

According to the last reported balance sheet, Quaser Machine Tools had liabilities of NT$1.06b due within 12 months, and liabilities of NT$1.36b due beyond 12 months. Offsetting these obligations, it had cash of NT$814.6m as well as receivables valued at NT$591.0m due within 12 months. So its liabilities total NT$1.01b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Quaser Machine Tools has a market capitalization of NT$1.79b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Quaser Machine Tools 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.

In the last year Quaser Machine Tools wasn't profitable at an EBIT level, but managed to grow its revenue by 9.3%, to NT$2.1b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Quaser Machine Tools produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping NT$230m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of NT$353m. In the meantime, we consider the stock very risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Quaser Machine Tools (of which 1 is significant!) you should know about.

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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