Wanshih Electronic (GTSM:6134) Is Carrying A Fair Bit Of 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. As with many other companies Wanshih Electronic Co., Ltd. (GTSM:6134) makes use of 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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Wanshih Electronic

What Is Wanshih Electronic's Debt?

As you can see below, at the end of September 2020, Wanshih Electronic had NT$346.5m of debt, up from NT$231.6m a year ago. Click the image for more detail. However, because it has a cash reserve of NT$339.6m, its net debt is less, at about NT$6.91m.

How Strong Is Wanshih Electronic's Balance Sheet?

We can see from the most recent balance sheet that Wanshih Electronic had liabilities of NT$730.4m falling due within a year, and liabilities of NT$134.7m due beyond that. Offsetting these obligations, it had cash of NT$339.6m as well as receivables valued at NT$550.2m due within 12 months. So it can boast NT$24.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Wanshih Electronic could probably pay off its debt with ease, as its balance sheet is far from stretched. But either way, Wanshih Electronic has virtually no net debt, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Wanshih Electronic'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.

In the last year Wanshih Electronic's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Wanshih Electronic produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at NT$33m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. 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. Take risks, for example - Wanshih Electronic has 3 warning signs (and 1 which is concerning) we think you should know about.

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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