Is Nan Juen International (GTSM:6584) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Nan Juen International Co., Ltd. (GTSM:6584) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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.

See our latest analysis for Nan Juen International

What Is Nan Juen International's Debt?

The image below, which you can click on for greater detail, shows that Nan Juen International had debt of NT$1.67b at the end of June 2020, a reduction from NT$1.81b over a year. However, it also had NT$122.5m in cash, and so its net debt is NT$1.55b.

A Look At Nan Juen International's Liabilities

Zooming in on the latest balance sheet data, we can see that Nan Juen International had liabilities of NT$466.9m due within 12 months and liabilities of NT$1.54b due beyond that. Offsetting this, it had NT$122.5m in cash and NT$282.1m in receivables that were due within 12 months. So it has liabilities totalling NT$1.60b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of NT$1.65b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Nan Juen International'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 Nan Juen International had a loss before interest and tax, and actually shrunk its revenue by 16%, to NT$1.6b. That's not what we would hope to see.

Caveat Emptor

While Nan Juen International'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$14m 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. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of NT$41m and the profit of NT$41m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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 instance, we've identified 4 warning signs for Nan Juen International (2 make us uncomfortable) you should be aware of.

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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