Is Rodex Fasteners (GTSM:5015) Using Too Much 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. As with many other companies Rodex Fasteners Corp. (GTSM:5015) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Rodex Fasteners

How Much Debt Does Rodex Fasteners Carry?

The image below, which you can click on for greater detail, shows that Rodex Fasteners had debt of NT$552.3m at the end of December 2020, a reduction from NT$629.7m over a year. However, it does have NT$646.4m in cash offsetting this, leading to net cash of NT$94.1m.

How Strong Is Rodex Fasteners' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Rodex Fasteners had liabilities of NT$760.7m due within 12 months and liabilities of NT$31.3m due beyond that. On the other hand, it had cash of NT$646.4m and NT$278.1m worth of receivables due within a year. So it can boast NT$132.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Rodex Fasteners could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Rodex Fasteners boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Rodex Fasteners's EBIT dived 11%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Rodex Fasteners 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Rodex Fasteners has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Rodex Fasteners produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Rodex Fasteners has net cash of NT$94.1m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$89m, being 78% of its EBIT. So is Rodex Fasteners's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with Rodex Fasteners (including 1 which makes us a bit uncomfortable) .

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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