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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Yeh-Chiang Technology Corp. (GTSM:6124) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Yeh-Chiang Technology
What Is Yeh-Chiang Technology's Debt?
As you can see below, at the end of September 2020, Yeh-Chiang Technology had NT$349.1m of debt, up from NT$112.3m a year ago. Click the image for more detail. However, its balance sheet shows it holds NT$905.0m in cash, so it actually has NT$556.0m net cash.
How Healthy Is Yeh-Chiang Technology's Balance Sheet?
The latest balance sheet data shows that Yeh-Chiang Technology had liabilities of NT$1.01b due within a year, and liabilities of NT$110.7m falling due after that. Offsetting this, it had NT$905.0m in cash and NT$915.5m in receivables that were due within 12 months. So it can boast NT$699.3m more liquid assets than total liabilities.
This surplus suggests that Yeh-Chiang Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Yeh-Chiang Technology has more cash than debt is arguably a good indication that it can manage its debt safely.
Another good sign is that Yeh-Chiang Technology has been able to increase its EBIT by 28% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Yeh-Chiang Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Yeh-Chiang Technology 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. Over the last two years, Yeh-Chiang Technology saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Yeh-Chiang Technology has net cash of NT$556.0m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 28% over the last year. So we are not troubled with Yeh-Chiang Technology's debt use. 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. For instance, we've identified 1 warning sign for Yeh-Chiang Technology that you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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About TPEX:6124
Yeh Chiang Technology
Engages in the production and sale of heat pipe components in Taiwan and internationally.
Mediocre balance sheet very low.
