Is Wieson Technologies (GTSM:6272) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Wieson Technologies Co., Ltd. (GTSM:6272) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Wieson Technologies

How Much Debt Does Wieson Technologies Carry?

As you can see below, at the end of June 2020, Wieson Technologies had NT$897.7m of debt, up from NT$849.7m a year ago. Click the image for more detail. However, it does have NT$137.2m in cash offsetting this, leading to net debt of about NT$760.6m.

How Strong Is Wieson Technologies's Balance Sheet?

The latest balance sheet data shows that Wieson Technologies had liabilities of NT$950.3m due within a year, and liabilities of NT$543.5m falling due after that. On the other hand, it had cash of NT$137.2m and NT$702.7m worth of receivables due within a year. So it has liabilities totalling NT$653.9m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the NT$427.3m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Wieson Technologies would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Wieson Technologies'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.

In the last year Wieson Technologies had a loss before interest and tax, and actually shrunk its revenue by 17%, to NT$2.2b. That's not what we would hope to see.

Caveat Emptor

While Wieson Technologies'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$16m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of NT$1.1m. In the meantime, we consider the stock to be risky. 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 example, we've discovered 3 warning signs for Wieson Technologies (1 is a bit unpleasant!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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