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. We note that Anli International Co., Ltd. (GTSM:5223) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Anli International Carry?
As you can see below, Anli International had NT$113.0m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has NT$393.0m in cash to offset that, meaning it has NT$279.9m net cash.
How Healthy Is Anli International's Balance Sheet?
We can see from the most recent balance sheet that Anli International had liabilities of NT$706.0m falling due within a year, and liabilities of NT$323.4m due beyond that. Offsetting these obligations, it had cash of NT$393.0m as well as receivables valued at NT$964.0m due within 12 months. So it can boast NT$327.6m more liquid assets than total liabilities.
This surplus suggests that Anli International has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Anli International boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Anli International grew its EBIT by 76% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Anli International 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Anli International 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. In the last three years, Anli International's free cash flow amounted to 20% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.
While we empathize with investors who find debt concerning, you should keep in mind that Anli International has net cash of NT$279.9m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 76% over the last year. So is Anli International's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Anli International that you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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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