Is Atech OEM (GTSM:6109) Using Too Much 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 note that Atech OEM Inc. (GTSM:6109) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Atech OEM

What Is Atech OEM's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Atech OEM had debt of NT$143.9m, up from NT$61.7m in one year. However, it does have NT$384.8m in cash offsetting this, leading to net cash of NT$240.9m.

How Strong Is Atech OEM's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Atech OEM had liabilities of NT$484.1m due within 12 months and liabilities of NT$111.9m due beyond that. On the other hand, it had cash of NT$384.8m and NT$324.9m worth of receivables due within a year. So it actually has NT$113.7m more liquid assets than total liabilities.

This surplus suggests that Atech OEM has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Atech OEM boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Atech OEM's load is not too heavy, because its EBIT was down 94% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Atech OEM 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Atech OEM 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. Happily for any shareholders, Atech OEM actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Atech OEM has net cash of NT$240.9m, as well as more liquid assets than liabilities. The cherry on top was that in converted 384% of that EBIT to free cash flow, bringing in NT$37m. So we don't have any problem with Atech OEM's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Atech OEM (1 makes us a bit uncomfortable) you should be aware of.

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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