Inalways (GTSM:5398) Has A Rock Solid Balance Sheet

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 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. Importantly, Inalways Corporation (GTSM:5398) does carry debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

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 Strong Is Inalways' 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. Offsetting these obligations, it had cash of NT$135.9m as well as receivables valued at NT$87.1m due within 12 months. So it actually has NT$155.1m more liquid assets than total liabilities.

It's good to see that Inalways has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any 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. When analysing debt levels, the balance sheet is the obvious place to start. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. Happily for any shareholders, Inalways actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

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. 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. To that end, you should be aware of the 1 warning sign we've spotted with Inalways .

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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