Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Inalways Corporation (GTSM:5398) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Inalways
How Much Debt Does Inalways Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 Inalways had NT$43.2m of debt, an increase on none, over one year. However, it does have NT$135.9m in cash offsetting this, leading to net cash of NT$92.8m.
How Healthy Is Inalways's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Inalways had liabilities of NT$64.8m due within 12 months and liabilities of NT$3.22m due beyond that. On the other hand, it had cash of NT$135.9m and NT$87.1m worth of receivables due within a year. So it can boast NT$155.1m more liquid assets than total liabilities.
This excess liquidity suggests that Inalways is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Inalways boasts net cash, so it's fair to say it does not have a heavy debt load!
It was also good to see that despite losing money on the EBIT line last year, Inalways turned things around in the last 12 months, delivering and EBIT of NT$16m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Inalways's earnings that will influence how the balance sheet holds up in the future. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Inalways 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 year, Inalways actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Inalways has net cash of NT$92.8m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$26m, being 166% of its EBIT. So is Inalways'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. To that end, you should be aware of the 1 warning sign we've spotted with Inalways .
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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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About TPEX:5398
Excellent balance sheet low.
