Would Kenmec Mechanical Engineering (GTSM:6125) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Kenmec Mechanical Engineering Co., Ltd. (GTSM:6125) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Kenmec Mechanical Engineering

How Much Debt Does Kenmec Mechanical Engineering Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Kenmec Mechanical Engineering had debt of NT$2.12b, up from NT$1.99b in one year. However, it also had NT$1.77b in cash, and so its net debt is NT$350.2m.

A Look At Kenmec Mechanical Engineering's Liabilities

We can see from the most recent balance sheet that Kenmec Mechanical Engineering had liabilities of NT$3.40b falling due within a year, and liabilities of NT$1.36b due beyond that. On the other hand, it had cash of NT$1.77b and NT$875.5m worth of receivables due within a year. So it has liabilities totalling NT$2.12b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Kenmec Mechanical Engineering is worth NT$7.51b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Kenmec Mechanical Engineering will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Kenmec Mechanical Engineering had a loss before interest and tax, and actually shrunk its revenue by 14%, to NT$3.9b. That's not what we would hope to see.

Caveat Emptor

While Kenmec Mechanical Engineering's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost NT$460m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled NT$155m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with Kenmec Mechanical Engineering , and understanding them should be part of your investment process.

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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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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