Is Quaser Machine Tools (GTSM:4563) A Risky Investment?

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.' 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. Importantly, Quaser Machine Tools, Inc. (GTSM:4563) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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?

As you can see below, at the end of September 2020, Quaser Machine Tools had NT$1.81b of debt, up from NT$682.7m a year ago. Click the image for more detail. On the flip side, it has NT$805.2m in cash leading to net debt of about NT$1.01b.

How Strong Is Quaser Machine Tools's Balance Sheet?

The latest balance sheet data shows that Quaser Machine Tools had liabilities of NT$1.17b due within a year, and liabilities of NT$1.34b falling due after that. On the other hand, it had cash of NT$805.2m and NT$521.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$1.18b.

This deficit is considerable relative to its market capitalization of NT$1.65b, so it does suggest shareholders should keep an eye on Quaser Machine Tools's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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.

Over 12 months, Quaser Machine Tools reported revenue of NT$2.3b, which is a gain of 46%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Quaser Machine Tools still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable NT$254m 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. 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$210m. So in short it's a really risky stock. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with Quaser Machine Tools (at least 2 which shouldn't be ignored) , and understanding them should be part of your investment process.

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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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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