We Think Anli International (GTSM:5223) Can Stay On Top Of Its Debt

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 can see that Anli International Co., Ltd. (GTSM:5223) does use debt in its business. But should shareholders be worried about its use of debt?

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 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Anli International

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 on the other hand it also has NT$393.0m in cash, leading to a NT$279.9m net cash position.

How Strong Is Anli International's Balance Sheet?

According to the last reported balance sheet, Anli International had liabilities of NT$706.0m due within 12 months, and liabilities of NT$323.4m due beyond 12 months. Offsetting this, it had NT$393.0m in cash and NT$964.0m in receivables that were due within 12 months. So it can boast NT$327.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Anli International could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Anli International has more cash than debt is arguably a good indication that it can manage its debt safely.

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. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Anli International may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Anli International recorded free cash flow of 20% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Anli International (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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