These 4 Measures Indicate That Rodex Fasteners (GTSM:5015) Is Using Debt Reasonably Well

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Rodex Fasteners Corp. (GTSM:5015) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Rodex Fasteners

How Much Debt Does Rodex Fasteners Carry?

As you can see below, Rodex Fasteners had NT$601.2m of debt at September 2020, down from NT$663.7m a year prior. But on the other hand it also has NT$752.2m in cash, leading to a NT$150.9m net cash position.

A Look At Rodex Fasteners's Liabilities

We can see from the most recent balance sheet that Rodex Fasteners had liabilities of NT$842.0m falling due within a year, and liabilities of NT$35.7m due beyond that. Offsetting this, it had NT$752.2m in cash and NT$248.2m in receivables that were due within 12 months. So it actually has NT$122.6m more liquid assets than total liabilities.

This surplus suggests that Rodex Fasteners has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Rodex Fasteners has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Rodex Fasteners if management cannot prevent a repeat of the 23% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Rodex Fasteners's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the last three years, Rodex Fasteners recorded free cash flow worth a fulsome 96% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Rodex Fasteners has NT$150.9m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$199m, being 96% of its EBIT. So we are not troubled with Rodex Fasteners's debt use. 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. Case in point: We've spotted 4 warning signs for Rodex Fasteners you should be aware of.

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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