Fu Chun Shin Machinery Manufacture (GTSM:6603) Is Carrying A Fair Bit Of Debt

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.' 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. As with many other companies Fu Chun Shin Machinery Manufacture Co., Ltd. (GTSM:6603) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Fu Chun Shin Machinery Manufacture

What Is Fu Chun Shin Machinery Manufacture's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Fu Chun Shin Machinery Manufacture had debt of NT$1.88b, up from NT$1.80b in one year. However, it does have NT$815.7m in cash offsetting this, leading to net debt of about NT$1.06b.

How Strong Is Fu Chun Shin Machinery Manufacture's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Fu Chun Shin Machinery Manufacture had liabilities of NT$1.93b due within 12 months and liabilities of NT$1.64b due beyond that. Offsetting this, it had NT$815.7m in cash and NT$1.37b in receivables that were due within 12 months. So it has liabilities totalling NT$1.38b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of NT$1.84b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Fu Chun Shin Machinery Manufacture'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 Fu Chun Shin Machinery Manufacture had a loss before interest and tax, and actually shrunk its revenue by 6.0%, to NT$3.1b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Fu Chun Shin Machinery Manufacture produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at NT$20m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through NT$59m of cash over the last year. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Fu Chun Shin Machinery Manufacture has 6 warning signs (and 2 which are a bit unpleasant) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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