Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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 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 step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Yeh-Chiang Technology Carry?
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. But on the other hand it also has NT$905.0m in cash, leading to a NT$556.0m net cash position.
How Strong Is Yeh-Chiang Technology's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Yeh-Chiang Technology had liabilities of NT$1.01b due within 12 months and liabilities of NT$110.7m due beyond that. On the other hand, it had cash of NT$905.0m and NT$915.5m worth of receivables due within a year. So it actually has 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Yeh-Chiang Technology'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. 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.
While it is always sensible to investigate a company's debt, in this case Yeh-Chiang Technology has NT$556.0m in net cash and a decent-looking balance sheet. And we liked the look of last year's 28% year-on-year EBIT growth. So we are not troubled with Yeh-Chiang Technology's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Yeh-Chiang Technology is showing 1 warning sign in our investment analysis , you should know about...
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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